The yen and the dollar fell on Monday, hitting seven-month lows against the Australian dollar as investor confidence about the global economy encouraged buying of commodity-related currencies. With Tokyo markets shut until Thursday for the Golden Week holiday and London on a one-day holiday, trading was lighter than normal but did not stop sterling and the New Zealand dollar from touching two-week highs against the yen.
Analysts said the gain in riskier currencies was driven by a confluence of improving US economic indicators, signs that the new flu strain outbreak appeared less severe than feared and rising stock markets. The S&P futures rose 0.3 percent, indicating a firm start on Wall Street later and Asian stocks rose to a seven-month high.
Reports on Friday showed US consumers felt more confident about the economy in April while a key gauge of manufacturing suggested it was gradually emerging from a deep slump. To add to the picture, a survey of manufacturing in China provided evidence that fiscal and monetary stimulus is reviving its economy.
"All these factors are helping risk appetite. The dollar and yen seem to be coming under some pressure and equities are firming," said Mitul Kotecha, global head of foreign exchange strategy at Calyon in Hong Kong. The Aussie jumped to $0.7390, its highest in seven months, and struck 73.54 yen, its strongest showing since mid-October. It later pared its gains to stand 0.7 percent up on the day at $0.7360 and 73.17 yen.
Soft Australian data, including a steep drop in house prices and adverts for jobs, did little to dent its fortunes, although analysts said the numbers added somewhat to the risk of a surprise rate cut from the Reserve Bank of Australia on Tuesday.
Analysts say the yen is being used as a funding currency for investors to ride rising trends in other currencies and take positions in commodity currencies expected to benefit as the outlook for the global economy improves. The New Zealand dollar advanced 0.5 percent to $0.5737 and gained 0.3 percent to 56.96 yen, while the Canadian dollar touched a fresh four-month high against the US dollar.
While the greenback lost ground broadly, it gained 0.3 percent to 99.44 yen, edging closer to the 100 yen level which it broke in early April to set a six-month high of 101.45 yen. But it failed to sustain the April move for long. "There's a view there's a lot of stop losses above there (100.00) and if we see dollar/yen 100 being broken then you could see a swift move higher to recent highs," Kotecha said.
The euro rose 0.3 percent to $1.3311 and 0.7 percent to 132.36 yen, although analysts said the market was wary ahead of a European Central Bank meeting on Thursday when it is expected to cut rates by 25 basis points to 1 percent. As well as the rate cut, the market is looking for what steps it might take in following central banks like the US Federal Reserve to adopt unconventional policy measures, such as direct asset purchases, to stimulate growth.
Investors will also await the findings of the US banks' stress tests this week and the US employment report on Friday, which is expected to show 620,000 jobs were lost in April, less than 663,000 lost in March. Analysts warned the stress tests and jobs numbers held risks for the relatively bullish investor sentiment, but Greg Gibbs, currency strategist at the Royal Bank of Scotland, said that confidence appeared to have gained positive momentum.
"Credit default swap, emerging market credit and implied volatility indices have fallen to their lowest levels since October. This resiliency in investor confidence suggests the Aussie and the kiwi will rally further in the week or so," Gibbs said.
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