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Dollar edges lower vs yen before Yellen testimony; sterling off lows

12 July 2017

The dollar hit a four-month high against the yen and global equity markets edged up on Tuesday as investors awaited testimony by Federal Reserve chairman Janet Yellen this week and any signs of tighter USA monetary policy.

Yellen, in a prepared testimony to be delivered to Congress at 10 a.m. ET (1400 GMT), said the economy is healthy enough to absorb further gradual rate increases and the slow wind down of the Federal Reserve's massive bond portfolio.

On Tuesday, the ICE Dollar Index DXY, -0.20% edged up by 0.1%, with the greenback tapping a four-month high against the Japanese yen. "She is unlikely to be as specific as the discussion in the FOMC minutes and will likely talk more casually about the fact that markets have remained strong and financial conditions have remained easy despite the Fed's recent hikes", BofAML argues. The Nasdaq composite gave up 15 points, or 0.3 percent, to 6,160.

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A rise in interest rates from the central bank of Canada would be the first such increase by that bank in close to seven years.

While the Federal Reserve chair is expected to say that the Fed still intends to steadily raise rates, any signals on how the bank is viewing a retreat in inflation and muted wage growth will be closely watched. The yield on the 10-year Treasury note fell to 2.37 percent from 2.38 percent late Monday.

Dealers remain upbeat after surprisingly strong U.S. jobs data persuaded analysts that the Federal Reserve remains on course for at least one more interest rate hike this year, boosting the dollar. The yen gained against the greenback, with the dollar breaching the 114 handle.

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Some focus was on the ongoing Trump-Russia political allegations stateside, after the President's son Donald Trump, Jr released a series of emails surrounding his meeting with Russian lawyer Natalia Veselnitskaya a year ago, in a bid to be "totally transparent". One of the goals of gradually unwinding the balance sheet would be to not disrupt broader economic growth despite the possibility of rising long-term rates.

Stock movers: Shares in NRG Energy Inc.(NRG) soared 18% after the company launched transformation plan to cut costs, slash debt and divest assets. The recent lower-than-expected USA inflation has clouded the outlook for higher rates, and analysts remain divided on whether the start of the balance sheet reduction will be announced at the September or December meeting.

Shares of Fastenal Co.(FAST) rose 3.7% after a well-received earnings report.

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Even as gold threatens to make more room to fall as it approaches the key support line at $1,200/oz, the overlooked global turmoil in terms of military threats (Syrian conflict, North Korea) as well as economic ones (the eroding worldwide trade order) could generate a snap-back in safe haven demand on any given day.