The US dollar hovered above a two-month low against the yen on Tuesday but struggled to extend gains on worries the US Federal Reserve could hint at withdrawing stimulus and unsettle financial markets. The Australian dollar slipped after the minutes of the Reserve Bank of Australia showed the bank thinks the currency remains high despite its recent steep decline and sees scope for further depreciation.
The dollar fetched 94.83 yen, up 0.3 percent from late US levels on Japanese importers buying. Yet it failed to break above resistance at 95 yen, let alone Monday's high of 95.22 yen, and wasn't far off a two-month low of 93.75 set on Thursday. Ever since Japanese Prime Minister Shinzo Abe started pushing late last year for radical monetary easing to revive the economy, the dollar/yen pair has been driven by share price moves, especially Japanese equities, rather than US bond yields, which traditionally have a strong correlation.
Speculation that Fed chief Ben Bernanke may indicate he could start winding down its stimulus program has led to a sell-off in global equities in recent weeks, helping the yen post its best weekly gain in nearly four years against the dollar last week. Bernanke will hold a news conference on Wednesday after the Fed's two-day policy-setting meeting starting later in the day.
"I tend to believe Bernanke will make comments supportive of stocks and that the dollar/yen is more likely than not to rise," said a trader at a European bank. On Monday, the US currency eked out slim gains after data showed growth in New York state's manufacturing sector picked up in June, while sentiment among US homebuilders surged to the highest in seven years.
"A softer reading could fan expectations that the Fed will strike a dovish tone, likely bringing down US bond yields and boosting stocks," said Junya Tanase, chief FX strategist at J.P. Morgan Chase. Still, some analysts do not rule out the risk of a further fall in the dollar/yen. "The dollar had risen 24 yen since late last year and hasn't come down even halfway from that. I expect continued weakness in the dollar," said Daisuke Uno, chief strategist at Sumitomo Mitsui Bank, noting that there are still big yen-selling positions.
The Australian dollar faced renewed selling pressure after dovish minutes of the Australian central bank's last policy meeting. The Aussie slipped 0.4 percent to $0.9519, edging closer to a 33-month trough of $0.9325 set a week ago on worries about a slowdown in China. The euro stood little changed at $1.3355, still within sight of a four-month peak of $1.3390 hit on June 13, though it was capped by hedge selling related to an option trigger at $1.34.
The common currency was underpinned partly because the European Central Bank's policy is seen as less accommodative than the Fed and the BOJ, both of which are actively expanding their balance sheets at this point. Although a prolonged economic contraction in the euro zone dampens investment flows into the euro zone, the currency has underlying support from the region's solid balance of payments, with its account surplus hitting a record high in March.
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