Bullish comments by Fed's Powell boost U.S. dollar

NEW YORK (Reuters) - The dollar rose to a three-week high on Wednesday, as demand increased after upbeat comments from U.S. Federal Reserve Chairman Jerome Powell about the U.S. economy.

In congressional testimony on Tuesday, Powell said he believed the United States was on course for years more of steady growth, and played down the risks to the U.S. economy of the escalating trade conflict.

He reiterated his remarks on Wednesday before a U.S. House panel.

Though Powell did not alter future expectations on U.S. monetary policy, traders saw his comments as signifying that authorities were comfortable with the greenback’s near 6 percent rise against its rivals in the last three months.

“For now, the market is of the view that the Fed is not overly concerned with the impact that a trade war could have,” said Omer Esiner, chief market analyst, at Commonwealth Foreign Exchange in Washington.

“The comments from the Fed have put the focus on the divergent policy outlook between the Fed and other central banks. We’re seeing that play out with the stronger dollar,” he added.

Against a basket of six major currencies, the dollar rose 0.3 percent to 95.202, after earlier hitting a three-week high, nearing a one-year peak of 95.53 hit in late June.

Data showing U.S. housing starts fell 12.3 percent in June briefly pared the dollar gains, however.

The greenback reserved most of its gains against the relatively higher-yielding currencies such as the Australian, Canadian, and New Zealand dollars.

Though concerns the U.S. economy may be nearing a peak as evident from a flattening yield curve and falling inflation adjusted-yields, the widening rate differentials between the U.S. and other major markets also lifted the greenback.

MIND THE GAP

The Fed is expected to hike rates two more times in 2018 to tackle rising inflationary pressures. Comparatively, the ECB is expected to start raising rates only in mid-2019.

With U.S. rates continuing to rise and most other major central banks taking only tentative steps towards monetary normalization, many analysts expect more dollar upside. RBC is forecasting a year-end euro/dollar of $1.12.

The dollar rallied to as high as 113.13 against the yen, its strongest since January 9. It was last at 112.79, slightly down on the day.

The euro, meanwhile, fell 0.2 percent to $1.1635.

In China, the yuan came under a renewed bout of selling against the dollar, which rose 0.4 percent to 6.7485 in offshore markets.