Yellen Testimony Cheat Sheet: Three factors set to rock stocks and the dollar

• Treasury Secretary nominee Janet Yellen is set to stress the need to spend, with markets eyeing debt funding.
• Hints about the second stimulus plan will also be watched. 
• Yellen's dollar policy is set to rock the greenback as well.

She's back – Janet L. Yellen has been returning to center stage once President-elect Joe Biden nominated her as his Treasury Secretary. Testifying before a Senate committee in her confirmation hearings, Yellen has ample space to rock markets with her plans. 

Here are three critical things to watch out for:

1) How will America pay for the new stimulus?

The former Chair of the Federal Reserve said that "now is the time to spend" – supporting Biden's $1.9 trillion plan. Senators will undoubtedly ask her about how such massive expenditure would be financed. She may talk about tax hikes – echoing Biden's call for "everybody to pay their fair share." In that case, stocks would fall and the safe-haven dollar would rise.

On the other hand, she may stress that borrowing costs are low and will likely stay as such. Indeed, despite the recent rise, the yield on ten-year Treasury bonds is only just above 1%.

By signaling that Uncle Sam will still be able to borrow at low rates, investors may get the impression that the Fed would buy more bonds. How closely are Yellen and her successor Jerome Powell coordinated? Any sign that the Fed could increase its bond buys would bolster stocks and send the dollar tumbling down.

2) Biden Stimulus 2.0

That $1.9 trillion stimulus proposal may undergo substantial changes before it is approved – but investors may eye the next move. In his economic speech, Biden talked about a two-pronged approach. The second package may include infrastructure spending and other boosts. 

Will Yellen provide insights about the next steps? Stimulus 1.0 will likely pass before March, when several programs expire, so the next moves are around the corner. The incoming Treasury Secretary will likely remain vague about the second move, but any hint about its potential size, timing, and scope could move markets.

The more Yellen discloses and the higher the sums, the better for risk – stocks may rise and the dollar would fall. Offering less would have the opposite effect. 

3) No more "strong dollar"

The US has been officially aiming to have a "strong dollar." While allowing markets to move the greenback, Treasury Secretaries have been expressing their desire to have a robust currency since the 1990s. Yellen may stray away from that, opting instead for a policy that officially encourages markets to determine the greenback's value. 

The difference is mostly symbolic – the US Treasury does not intervene in trading, but the actions of the US government and the Federal Reserve undoubtedly rock the currency. Nevertheless, a formal shift away from the "strong dollar" may weaken it.

Conclusion

Yellen's Congress comeback could prove explosive, especially on debt, stimulus, and the dollar. 

More Five factors moving the US dollar in 2021 and not necessarily to the downside