The dollar nursed hefty losses against the yen and euro on Thursday after tumbling overnight when a top Federal Reserve official tempered expectations on the timing of future U.S. interest rate increases.
The U.S. currency took a beating on Wednesday after New York Fed President William Dudley said financial conditions were considerably tighter and a weakening outlook for the global economy would have to be taken into account.
The dollar was also weighed down by a survey from the Institute of Supply Management (ISM) showing activity in the vast U.S. services sector slowed to a near two-year low in January, adding another layer of uncertainty on the Fed’s near-term policy path.
The dollar was almost flat at 118.01 yen after dropping 1.7 percent overnight. The greenback handed back all the gains made against the yen after the Bank of Japan (BOJ) adopted negative interest rates late last week, pushing the dollar to a 6-week high of 121.70.
The BOJ’s shock decision was seen by many as an attempt to prevent the yen from appreciating, as the safe-haven currency had soared to a one-year peak against the dollar last month in the face of widespread risk aversion.
“The BOJ might have tried to do something by opting for negative rates, but in reality the initiative belongs elsewhere. Dollar/yen is dictated by global risk sentiment, which also decides the trend in the currency market as a whole,” said Junichi Ishikawa, market analyst at IG Securities in Tokyo.
“The BOJ can only do so much. The markets see through the fact that the central bank’s efforts would not be effective in the absence of domestic demand, which is up to the government to create through its policies.”
The euro traded at $1.1084, hovering near a 3-1/2-month high of $1.1145 scaled overnight. The single currency rallied 1.7 percent against the dollar after U.S. Treasury yields slipped to 10-month lows in the wake of the Dudley comments and downbeat data.
The dollar index struggled at 97.335 after dropping to a 3-month trough of 96.885 on Wednesday.
The market focus will now shift to U.S. factory orders data, and comments by Cleveland Fed President Loretta Mester and Boston Fed President Eric Rosengren later in the session.
“The dollar may rebound as it could have overreacted to the ISM non-manufacturing numbers. But it could still fall below 117 yen on fresh dovish comments from Fed officials,” said Masafumi Yamamoto, chief FX strategist at Mizuho Securities in Tokyo.
“Of the Fed officials due to speak today, focus will be on whether Mester turns dovish.”
Mester had told Reuters in an interview early last month that she would prefer rates to be raised a little more quickly.
Commodity-linked currencies held to Wednesday’s gains on a sharp rebound in crude oil prices and the dollar’s broad retreat.
The Canadian dollar rose to a 7-week high of C$1.3720 to the dollar. The advance helped reverse weakness seen earlier in the year, when the loonie slumped to a 13-year trough of C$1.4689 amid a tumble in crude oil.
The Australian dollar nudged up to a 1-month high of $0.7191.