The dollar steadied on Monday as investors squared positions and looked to the Federal Reserve's upcoming policy meeting for clues on the outlook for US interest rates.
The dollar eased last week as the market lacked fresh incentives to push the currency higher after it rallied earlier this month on a run of upbeat economic data that weakened expectations that the Fed could cut rates early next year. Traders said the correctional phase appeared to be over for now, with more players showing interest in buying back the dollar at its dips.
"The dollar's recovering, with players less concerned about its downside," said a dealer at a Japanese trust bank. "For the currency to test its upside, the market has to wait until the Fed's meeting." The Fed is widely expected to hold rates at 5.25 percent for the third straight meeting on Tuesday and Wednesday and repeat warnings on inflation, although many traders think the Fed may be done raising rates.
In a Reuters poll published last week, 14 out of 21 US primary bond dealers surveyed said the Fed's next move would be to cut rates, although views were split on the timing of such a move. The remaining seven believe the US economy will rebound from a third quarter slowdown and generate enough inflation pressures to force the Fed to push rates higher.
The dollar edged up to 118.80 yen from 118.70 yen in late US trade on Friday, and up from last week's low of 118.05 yen. It hit a 10-month high of 119.88 yen earlier this month. The euro was little changed at $1.2615 and up slightly at 149.85 yen. After the Fed meeting, focus will turn back to economic data, with figures for US gross domestic product in the third quarter and Japanese consumer prices due on Friday.
The Bank of Japan is widely expected to boost its overnight rate from 0.25 percent during the business year to March, but a big rate differential will likely support an outflow of investment into higher-yielding currencies, capping the yen's rise, traders said. The latest International Monetary Market data showed that net yen short positions stayed high even after easing slightly to 112,578 in the week ending October 17 from a record 123,598 the previous week.
Traders said the yen got a slight boost against the euro after French Finance Minister Thierry Breton said the Japanese currency was progressing in "a favourable direction". The Australian dollar hit its highest level in 10 months against the yen, rising as far as around 90.35 yen after a higher-than-expected rise in producer prices in the third quarter.
The data reinforced speculation that the Reserve Bank of Australia could bump up interest rates next month for the third time this year. "There is buying of currencies such as the Australian dollar against the yen, and the strength in the crosses is helping to support the dollar/yen," said a dealer at another Japanese trust bank. "I expect the yen to stay weak with the crosses looking quite solid."
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