Investing.com -- EUR/USD rose sharply on Tuesday extending gains from the previous session, after Janet Yellen dragged down the dollar by strongly emphasizing that the Federal Reserve should proceed cautiously in normalizing its current monetary policy cycle.
The currency pair traded in a broad range between 1.1169 and 1.1303, before settling at 1.1292, up 0.0097 or 0.87% on the session. At session highs, the euro eclipsed 1.13 versus the dollar for the first time in eight sessions. It came one day after EUR/USD halted a seven-day losing streak on Monday, triggered by hawkish remarks from Yellen's colleagues that the Fed should implement more than one interest rate hike on the calendar year.
The dollar is headed for its worst month in more than five years.
EUR/USD likely gained support at 1.0538, the low from December 3 and was met with resistance at 1.1496, the high from Oct. 15.
Citing increased risks with global financial and economic conditions, as well as longstanding concerns with the price of oil, Yellen reiterated that only gradual increases in the Fed's benchmark Federal Funds Rate should be warranted in the coming years. The Federal Open Market Committee has held the Fed Funds Rate at a targeted range between 0.25 and 0.50% for each of the last two meetings since abandoning a seven-year zero interest rate policy in December.
"Implicitly, this expectation of fading headwinds and a rising neutral rate is a key reason for the FOMC's assessment that gradual increases in the federal funds rate over time will likely be appropriate," Yellen said at a speech before The Economic Club of New York. "That said, this assessment is only a forecast. The future path of the federal funds rate is necessarily uncertain because economic activity and inflation will likely evolve in unexpected ways. Reflecting global economic and financial developments since December, however, the pace of rate increases is now expected to be somewhat slower."
While Yellen noted that the domestic economy has displayed remarkable resiliency as the labor market shows improvement, she emphasized that a slowing global economy continues to spillover into the U.S. In particular, Yellen indicated that the FOMC is concerned with slowing manufacturing and export levels amid a weak economic outlook in China.
"There is a consensus that China's economy will slow in the coming years as it transitions away from investment toward consumption and from exports toward domestic sources of growth," Yellen said. "There is much uncertainty, however, about how smoothly this transition will proceed and about the policy framework in place to manage any financial disruptions that might accompany it. These uncertainties were heightened by market confusion earlier this year over China's exchange rate policy."
Yellen's remarks also contradict a wave of hawkish comments from centrist Fed policymakers, who have argued that the Fed should implement multiple rate hikes before the end of the year amid rising inflation and sharp declines in the dollar. Last week in an unexpected development, St. Louis Fed president James Bullard, Philadelphia Fed president Patrick Harker and San Francisco Fed president John Williams all supported further tightening measures from the U.S. central bank over the next several months.
The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, fell more than 0.85% to an intraday low of 95.08 before settling at 95.18. The index is down by more than 1% over the last month of trading. Any rate hikes by the Fed this year are viewed as bullish for the dollar, as investors pile into the greenback in order to capitalize on higher yields.
Yields on the U.S. 10-Year fell eight basis points to 1.80%, while yields on the Germany 10-Year lost four basis points to 0.14%. Government bond yields on 10-year U.S. Treasuries fell considerably following Yellen's comments.