The dollar pulled back in Asian trading on Thursday as investors took profits following its rise to seven-month highs, as Federal Reserve officials' comments as well as minutes from the central bank's latest meeting hinted that an interest rate hike could be right around the corner. The dollar modestly extended its losses against its Japanese counterpart after the Bank of Japan kept monetary policy steady as widely expected, despite the country's recent slip into a technical recession.
The dollar index was down about 0.4 percent at 99.217. It hit a high of 99.853 overnight, closing in on its 12-year peak of 100.39 set in March. "I don't think there's any fundamental shift here, just a bit of profit-taking after the minutes, and I don't see any change to the dollar's trajectory," said Mitul Kotecha, head of Asian FX and rates strategy at Barclays in Singapore.
The minutes showed that Fed policymakers made an unusually direct reference to a possible December rate increase at the central bank's October 27-28 meeting. A chorus of Fed officials also backed investors' expectations of a rate hike, with Fed President Dennis Lockhart, New York Fed President William Dudley and Cleveland Fed President Loretta Mester all expressing confidence that the policy tightening, when it comes, will be implemented smoothly for markets.
"It seems the argument has moved on from when the Fed will raise rates to how many hikes we will see in 2016," Chris Weston, chief market strategist at IG Ltd in Melbourne, said in a note to clients on Thursday. The Fed funds futures curve is pricing in just over two hikes throughout 2016, which Weston said was the best guide for trading the dollar. "With a further widening of the US Treasury/German bund yield spread, the odds of traders buying the USD ahead of the 16 December FOMC meet and then selling once we get confirmation of the hike seems elevated," Weston said.
Against the yen, the dollar fell about 0.3 percent to 123.25 yen, down from a three-month peak of 123.77 yen scaled after the Fed minutes. At his post-meeting briefing later in the session, BOJ Governor Haruhiko Kuroda is expected to reiterate that tightening labour markets will push up wages and help Japan recover from a temporary soft patch. Some economists, though, fear the soft patch is deeper than officials admit. Ministry of Finance data released early on Thursday showed that Japan's exports fell 2.1 percent in October, posting the first year-on-year decline in more than a year, underscoring weak external demand hit by China's slowing growth.
"Japan's economy has continued to recover moderately, although exports and production have been affected by the slowdown in emerging economies," the BOJ said in its statement on Thursday. The BOJ kept its economic assessment unchanged. The euro added about 0.4 percent to $1.0703, pulling away from Wednesday's seven-month low of $1.0617, with its upside capped by expectations that the European Central Bank will take fresh monetary easing steps next month continuing to pressure the common currency.
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