Fed Speculation, PBOC Announcement Leave US Dollar on Defensive Footing

The US Dollar is indecisive during the New York trading session on Tuesday after seeing two days of losses.

Fed Rhetoric

Yesterday the greenback fell to its lowest levels since November 7th after New York Fed President William C. Dudley delivered a speech to students and professors at Queens College in New York.

Dudley is widely seen as a staunch dove and supporter of the accommodative monetary policy of Fed Chairman Bernanke.

In his speech he cited positive developments, saying "Not only do we have some better data in hand, but also the fiscal drag, which has been holding the economy back, is likely to abate considerably over the next few years at the same time that the fundamental underpinnings of the economy are improving."

However, he said that he anticipates "very accommodative" monetary policy to remain "for a considerable period of time."

The US dollar had already been under pressure after Janet Yellen testified at her confirmation hearing before the Senate Banking Committee.

Yellen's remarks raised expectations that the Federal Reserve will maintain its $85 billion-a-month bond purchase for the near future.

PBoC comments

The US dollar traded modestly lower on Tuesday after the PBoC announced plans to gradually expand the yuan trading band.

People’s Bank of China Governor Zhou Xiaochuan wrote “We will increase the role of market exchange rates, and the central bank will basically exit from normal foreign-exchange market intervention.”

The yuan has been viewed as a potential future reserve currency, a currency that is held by governments and institutions as part of their foreign exchange reserves. However, the Chinese yuan cannot be used as a reserve currency while the Chinese government maintains capital controls on its conversion.

ICE US Dollar Index Daily Chart

Looking at the Dollar Index daily chart we can see that price found support at the 38% retracement level and is close to forming a doji candlestick.