Dollar Steps Back, Outlook Still Solid On Diverging Monetary Policy Paths

The dollar took a step back on Wednesday but retained a bulk of its overnight gains after currency bulls scooped up the greenback following the tumble induced by weak U.S. non-farm payrolls late last week.

The dollar was down 0.2 percent at 120.09 yen JPY= after jumping 0.6 percent the previous day, when currency markets returned to full strength following the Easter holidays.

The greenback was back at a level prior to Friday’s much weaker-than-expected U.S. jobs data release, which took it down to as low as 118.71 yen by cooling prospects of an earlier interest rate hike by the Federal Reserve.

Market reaction was mostly muted to the Bank of Japan’s decision to stand pat on monetary policy.

“The dollar dipped a little but the reaction was a token one as most in the market expected the BOJ to keep policy steady,” said Bart Wakabayashi, head of forex at State Street in Tokyo.

Hopes for further easing, however, have been building in some quarters as the BOJ has missed its ambitious target of achieving 2 percent inflation in two years.

“The lift on prices from the consumption tax hike will soon fade. With the rise in prices already looking weak relative to those in other G10 countries, the BOJ may have to stay a step ahead and act,” Wakabayashi at State Street said.

The euro nudged up 0.2 percent to $1.0837 EUR= after falling 1 percent overnight. The common currency had climbed as far as $1.1036 earlier in the week, albeit in thin trading as many key markets were still shut for the Easter holidays.

The dollar’s recent rebound was testimony to its underlying strength as it occurred in the absence of supportive U.S. data and debt yields, which actually dipped on Tuesday.

Moreover, the bounce helped reinforce the notion that the diverging monetary policy theme remained a key underlying factor. The Fed is poised to hike rates sooner or later but its euro zone and Japanese counterparts remain committed to quantitative easing.

“The dollar bounced on underlying demand rather than on a set of factors. The Fed may have to delay hiking rates, but it is still on track to tighten policy when its peers are stuck in quantitative easing,” said Shinichiro Kadota, chief Japan forex strategist at Barclays in Tokyo.

“Investor flows continue to favour the dollar under such conditions, with yields in Europe at very low levels and Japanese investors seeking foreign assets as part of their portfolio rebalancing,” he said.

The dollar index .DXY slipped 0.1 percent to 97.718 after gaining 0.9 percent overnight.

The Australian dollar edged up 0.3 percent to $0.766 AUD=D4, adding to the previous day’s big gains. The Aussie soared to as high as $0.7711 overnight after the Reserve Bank of Australia surprised some by standing pat on monetary policy.

Sterling gained 0.1 percent to $1.4830 GBP=D4. The pound was caught overnight between stronger-than-expected British services sector data and uncertainty ahead of next month’s national election.

Source : Reuters