The dollar was buoyant against the yen and euro on Monday as the risk-on mood inspired by solid U.S. economic data and fading fallout from Brexit continued to lift the U.S. currency and assets.
Upbeat U.S. business activity data out on Friday also added to prospects of a Federal Reserve interest rate hike within the year and supported the greenback.
The global improvement in risk sentiment – Wall Street shares have hit consecutive record highs this month – has weighed on the Japanese currency, which has fallen roughly 7 percent against the dollar from a three-year peak reached soon after the Brexit referendum a month ago.
“Thanks to a strong indicators, concerns about the U.S. economy after Brexit have receded. Add the good corporate results, and faith in the U.S. economy has recovered greatly,” said Koji Fukaya, resident of FPG Securities in Tokyo
The euro was down 0.1 percent at $1.0965 EUR= after slipping to a one-month low of $1.0955 on Friday in the wake of shootings in Munich. Against the safe-haven yen the dollar was up 0.3 percent at 106.52 JPY= amid a bounce in Tokyo’s Nikkei .N225, having recovered from a dip to 105.77 on Friday.
The yen has also been on the defensive amid hopes that the Bank of Japan would further ease monetary policy at its July 28-29 policy meeting.
While the BOJ has effectively dashed hopes that it would adopt unorthodox “helicopter money” stimulus methods, the market has maintained its expectations that the central bank would ease in one form or the other.
“Dollar/yen could test the 108 handle if the Fed’s comments this week are supportive towards a rate hike and if the BOJ eases. On the other hand, the pair could drop below 105 if the BOJ stands pat as easing expectations are well entrenched,” said Fukaya at FPG Securities.
Central bank meetings will be the focus of market attention this week, with the Fed also holding a policy conclave on July 26-27.
While the Fed is widely expected to stand pat on monetary policy, investors will be sifting through its statements for the merest hint of a near-term rate increase following recently firm U.S. economic indicators that have revived tightening expectations.
Fed funds futures rates on Friday priced in a 48 percent chance that the Fed will hike rates at its December meeting. A few weeks ago that probability was less than 20 percent.
The net dollar net long position increased to $10.42 billion in the week ended July 19 from $8.01 billion the previous week, according to Reuters calculations and data from the Commodity Futures Trading Commission issued on Friday.
Still, some market participants saw easing by the BOJ having a limited impact – a potential disappointment for dollar bulls.
“At this point it is hard to tell how much the yen would weaken even if the BOJ were to ease. It is widely expected to ease through its ETF-purchasing program and that won’t have much of a yen-weakening effect,” said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.
The ongoing boon for risk assets is a key factor supporting the dollar and weakening the yen, but the headwinds commodity markets are beginning to face could reverse that trend, Yamamoto said.
Sterling steadied at $1.3116 GBP=D4 after falling roughly 1 percent on Friday after surveys showed business activity had wilted after the Brexit vote.
The Australian dollar was also little changed, at $0.7471 AUD=D4, after slipping 0.4 percent on Friday against the broadly stronger dollar.
Source: Reuters
