The dollar slumped broadly on Friday, halting a rally that had taken it to an 11-month high against the yen and a one-month peak versus the euro, but a dearth of significant economic data in the near term could restore the greenback's strength.
Higher rates favoured the dollar over the past week, boosting it 1.1 percent against the yen for its six straight week of gains. Profit-taking, however, sent the dollar lower on Friday as tame US inflation data prompted investors to rethink expectations of higher interest rates.
A rise in Treasury bond yields after recent strong economic data reflected investors betting that the Federal Reserve may be more aggressive and tighten monetary policy sooner than anticipated, or at least push further stimulus off the table. Steven Englander, head of G10 strategy at CitiFX, a division of Citigroup in New York, said in the very short term, Friday's price action was a bit of a reversal in the trend for stronger US data and higher rates.
"We have also seen a decent rally in risk-correlated currencies, and some convergence of yields in the euro zone giving the euro a boost." Englander said there are several lessons to be learned from the recent price action. "First, it doesn't take much to reverse the USD buying trend, and second, lower inflation is a plus for risk-correlated currencies because it reduces risk of any near-term hiking move," he said. "The third lesson is that the euro still responds positively to tail-risk reduction."
The euro was last up 0.6 percent at $1.3164 and up about 0.4 percent on the week against the dollar, snapping two weeks of declines at current prices. CitiFX said the next couple of weeks will offer few opportunities for investors to evaluate the evolution of the global economy, and in the absence of significant US economic data, the bank is looking for USD strength to persist.
Next week's data calendar is on the light side, with an emphasis on the housing sector. In addition, Bank of England minutes from its latest policy meeting and euro area PMIs will emerge on Wednesday and Thursday, respectively. Australia's central bank's February minutes and New Zealand's GDP will be released on Tuesday and Thursday, respectively. Nomura Securities said a break of 2.40 percent yield for the 10-year Treasury note looks likely.
"While global rates have also been on the move, we think the trend outside the US is less durable, given the significant growth head-winds clearly at play (especially in the Eurozone)," the bank said. "On this basis, we think a break of 2.40 percent yield in the US could be a catalyst for further USD gains over the next few weeks, especially versus low-yielders."
Nomura is entering short-term dollar calls versus the British pound and Swiss franc in the form of 2-week one-touches, with trigger levels embedded in the structures are 0.9400 for USD/CHF and 1.5575 for GBP/USD. "We think these are achievable short-term targets if the US yield curve continues to shift," the bank said.
The dollar was last down 0.2 percent at 83.34 yen, though not far from an 11-month peak touched on Thursday as the yen continued to struggle in the wake of surprise monetary easing in Japan last month. Currency speculators increased their bets against the yen in the latest week to their highest in nearly five years, according to data from the Commodity Futures Trading Commission released on Friday. The dollar has gained around 8 percent against the yen so far this year as the spread between the two-year US Treasury yield and its Japanese counterpart remain elevated at levels not seen since mid-2011, Reuters data showed.
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