Dollar retreats and EM currencies surge ahead of Yellen testimony

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The yen and emerging market currencies advanced as the dollar retreated on Tuesday morning, ahead of Federal Reserve chair Janet Yellen’s semi-annual congressional testimony this afternoon.

Investors are waiting to hear whether Ms Yellen provides any indication of a rate hike at next month’s Federal Reserve meeting as inflationary pressures build in the US.

The dollar index, which tracks the currency against a basket of peers, is down 0.13 per cent to 100.84, helping the yen climb a third of a per cent to 113.38 per dollar.

The move has also provided a big boost to emerging market currencies, with the rand, rouble and lira all extending their recent gains.

EM assets took a hit after Donald Trump’s surprise election victory, stoking fears of protectionist trade policies, a stronger dollar which inflates the costs of many countries’ dollar-denominated debt, and expectations of faster interest rate rises which draw investor funds back toward the US.

But EM currencies have rallied in recent weeks as confidence in the US president’s stimulus plans has waned. The South African currency climbed an extra 1.7 per cent today to 13.1116 per dollar, its strongest level since October 2015, while the rouble broke through 57 per dollar for the first time since July 2015, climbing 1 per cent today.

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