The dollar slipped against the yen on Wednesday on concerns about rising tensions between the United States and North Korea while the Canadian dollar held firm after the nation's central bank chief backed an interest rate increase. The dollar shed 0.3 percent in early trade to fetch 113.00 yen, slipping further from Monday's 1-1/2-month high of 113.48.
The yen tends to be bought back at times of heightened global uncertainty because of expectations Japanese investors may repatriate their foreign investment, despite the country's proximity to North Korea. Pyongyang said on Wednesday it had conducted a test of a newly developed intercontinental ballistic missile (ICBM) that can carry a large and heavy nuclear warhead, triggering a call by Washington for global action to hold the isolated nation accountable for its pursuit of nuclear weapons.
The Pentagon condemned the missile test and said it was prepared to defend the United States and its allies, while South Korea's defence minister said he sees a high possibility of a nuclear test by North Korea. "US hi-tech shares have been getting a bit unstable of late and we had an ICBM during US market holiday (on Tuesday). So the markets are becoming a bit risk averse," said Minori Uchida, chief forex analyst at the Bank of Tokyo-Mitsubishi UFJ.
The Canadian dollar also held firm, trading at C$1.2934 per dollar after having hit a 10-month high of C$1.2912 to the dollar on Tuesday. Bank of Canada Governor Stephen Poloz told a German newspaper that Canada's inflation should be well into an uptrend by the first half of 2018, adding that policy normalization must begin before price growth hits its target.
His comments prompted markets to price in a more than 50 percent chance of a rate hike at the central bank's next meeting on July 12, a dramatic turn from less than two weeks ago when barely anyone had bet on a tightening. The Bank of Canada is in tune with policy makers at the European Central Bank and the Bank of England who last week also signalled future tightening, supporting the euro and the pound against the dollar.
Although the common currency slipped early this week after rallying 2.1 percent last week, it has stabilised around $1.1359. "If we have more comments from ECB officials clearly implying tapering of its stimulus, we could see further upside in the euro," said Bart Wakabayashi, Tokyo Branch Manager of State Street. Last week's top of $1.1445, its highest level in over a year, is seen as its immediate target. A clear break of the $1.15-16 area would signal a major departure from its trading range since early 2015.
The euro may struggle, however, to break above that range if upcoming US data support the case for the Federal Reserve to keep winding back its stimulus, some market players said. The minutes of its last policy meeting due at 1800 GMT on Wednesday are expected to shed more light on the Fed's thinking on its future policy path. Many market players expect the Fed to announce a plan to start reducing its balance sheet in September and raise interest rates in December.
The Australian dollar licked wounds at $0.7617 after the nation's central bank stuck to a neutral stance on the economy and interest rates on Tuesday, disappointing many traders who had expected a more hawkish tone. The Aussie showed limited reaction to a private survey by Caixin/Markit for June showing a cooling in the services sector in China - Australia's major trading partner.
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