Dollar drops against euro, yen on risk aversion, dovish Fed views

The U.S. dollar edged lower against the safe-haven yen on Friday amid uncertainty over the fallout from Britain’s vote to exit the European Union, while the dollar dropped against the euro partly on reduced expectations of a U.S. interest-rate hike this year.

While the sterling was last down 0.65 percent at $1.3281, it still hovered above a 31-year low of $1.3122 touched Monday. Analysts said political uncertainty in Britain following the Brexit vote was helping the yen gain. The dollar was last down 0.6 percent against the yen at 102.66 yen after touching a session low of 102.44 yen in early trading.

Former London Mayor Boris Johnson abruptly pulled out of the race to become Britain’s prime minister Thursday, a position he was once favored to win, upending the contest less than a week after he led a campaign to take the country out of the EU.

“UK politics are in an absolute shambles right now,” said Chris Gaffney, president of EverBank World Markets in St. Louis. “It’s really people looking for safe havens and looking for shelter from the uncertainty,” he said in reference to the yen’s gains.

The euro was last up 0.2 percent against the dollar at $1.1124 after hitting a one-week high of $1.1168 in morning U.S. trading. Analysts said the prospect of a U.S. Federal Reserve rate increase by the end of the year was likely off the table, removing a key pillar of support for the dollar.

“The dollar’s weak not because rate hikes have dimmed, but rather because the Fed has turned off the lights and walked out of the room,” said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange in New York.

Gaffney of EverBank said a Reuters report on Friday saying the European Central Bank was not considering buying government debt out of proportion to euro zone countries’ shareholding in the bank also helped the euro gain against the dollar.

The euro had fallen sharply on Thursday, along with European bond yields, on a Bloomberg report that the ECB had been considering giving up the capital key due to a shortage of German paper, which investors see as safe and have piled into in the aftermath of Britain’s vote to leave the EU.

The dollar index, which measures the greenback against a basket of six major currencies, was last down 0.41 percent at 95.74.

Source: Reuters