Dollar edges down but close to recent highs; Fed, BOJ in focus

The dollar edged down on Monday but remained well off recent lows as markets started the week on a calmer note and investors turned their attention to upcoming central bank meetings.

The dollar inched down slightly against its Japanese counterpart to 118.75 JPY=, but remained not far from a two-week high of 118.88 touched on Friday, just a day after it dropped to a one-year low of 115.97.

The U.S. Federal Reserve is widely expected to leave its federal funds rate unchanged at 0.25-0.50 percent at the conclusion of its policy meeting on Wednesday.

However, traders will be more focused on whether the possibility of cooling inflation and recent global market turmoil could prompt the Fed to signal concern about the U.S. and world economic outlooks that may raise questions about its pace of interest rate tightening.

“Some market participants have concerns over the Chinese economy and the low oil prices, so many would like to see the FOMC statement,” said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

“But for today, I think currency markets will be quiet as long as other markets are,” he said.

Fears of the fallout of the slowing growth in China helped send crude oil prices to 13-year lows last week, and set the stage for a short squeeze on Friday that saw crude soar more than 10 percent. [O/R]

The recently risk-averse mood and volatile markets have led investors to pare bets on any more Fed interest rate hikes on the near horizon, and reduce their dollar positions.

Economists polled by Reuters in mid-January forecast three hikes in 2016 rather than the four initially floated by the Fed.

Speculators reduced bullish bets on the U.S. dollar for a fourth straight week through Jan. 19, as net longs fell to their lowest level since late October, according to Reuters calculations and the latest data from the Commodity Futures Trading Commission released on Friday.

“Markets are concerned about both continued tightening and a U.S. recession. They likely only need to worry about one,” Andrew Sheets, chief cross-asset strategist at Morgan Stanley wrote in a note to clients.

“Were the Fed to remind the market that it remains data-dependent, it could temporarily alleviate some of the pressure on USD,” Sheets said.

The Bank of Japan will conclude a two-day policy meeting on Friday, at which sources familiar with its thinking say it is likely to cut its core consumer inflation forecast for the coming fiscal year to possibly below 1 percent.

While the BOJ is expected to hold policy steady this week, downbeat economic reports have increased market speculation of more easing by April.

Japanese trade data released early on Monday showed exports skidded 8 percent from a year earlier, a deeper drop than forecast and down for the third straight month as the slowdown in China and emerging markets took a toll.

The euro was up about 0.1 percent at $1.0803 EUR=EBS, but still not far from a two-week low of $1.0776 hit on Thursday after European Central Bank President Mario Draghi’s unexpectedly strong hints that the ECB could have additional stimulus measures up its sleeve.

Draghi stressed on Friday the outlook for a gradual economic recovery in the euro zone had not changed, and that the bank had plenty of instruments at its disposal to kindle euro zone inflation and was willing to use them.

The dollar index .DXY =USD, which tracks the greenback against a basket of six major rivals, was about 0.1 percent lower at 99.463, but still not far from a more than one-month high of 99.790 touched on Thursday.

The Australian dollar added about 0.1 percent to $0.7005 AUD=D4, well above last year’s 7-year trough of $0.6827, underpinned by the recovery in crude oil prices.

Source: Reuters