Dollar gains, bond prices fall after Yellen remarks

Fri May 27, 2016 4:53pm EDT
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By Saqib Iqbal Ahmed and Caroline Valetkevitch

NEW YORK (Reuters) - The U.S. dollar index hit a two-month high and U.S. bond prices fell on Friday after Federal Reserve Chair Janet Yellen said a U.S. interest rate hike will likely be appropriate in the coming months.

Although they briefly trimmed gains on Yellen's remarks, U.S. stocks ended higher and the S&P 500 capped off its strongest week since March. MSCI's all-country world stock index .MIWD00000PUS had its best weekly performance since mid-April.

"It's appropriate... for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate," Yellen told an audience of Harvard University professors and alumni.

Yellen's comments follow a chorus of policymakers who in recent weeks have talked up expectations that an increase in borrowing costs may be near.

"The market wasn't looking for anything from Yellen. It ended up she said something that was a bit hawkish, especially for her," said Thomas Roth, head of U.S. Treasury trading at Mitsubishi UFJ Securities USA Inc.

Short-dated U.S. bond yields spiked after the comments. The two-year yield US2YT=RR was up more than 4 basis points at 0.911 percent, while the five-year US5YT=RR gained 4 basis points to 1.386 percent.

In the foreign exchange market, the dollar index .DXY rose 0.60 percent to 95.745, the highest level since March 29. It has surged from a low of 91.919 on May 3.

The dollar gained earlier on Friday after U.S. economic growth was revised upward for the first quarter.   Continued...

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., May 25, 2016.  REUTERS/Brendan McDermid