The dollar inched higher against the yen on Tuesday, while the euro again proved relatively robust in the face of fears that Greece may be edging towards a debt default and departure from the euro. It has been a messy fortnight for major currency markets, with little clarity on how much credence investors really give to the prospect of Greece leaving the single currency or what impact that would have.
Looking at spot exchange rates, not much: in two months during which deadlines to seal a deal to allow the flow of more cash to Athens have been missed, the euro is up 7 percent against the dollar and 3 percent against a basket of currencies. Many had argued that was chiefly a function of rising euro zone bond yields, but German Bund yields have fallen back 20 basis points in the past week.
A number of dealers and strategists pointed to talk that some central banks might be buying the single currency while others said that a rise in Spanish and other peripheral bond yields over the last few days may have drawn more interest. "Some international investors may be taking advantage of cheap bond prices by grabbing yield, and euro exposure, on the belief that a Greek deal will eventually come," said Stephen Gallo, head of European FX strategy with BMO in London.
"Higher risk premia exert a downward force on the euro. However, GDP-weighted rate differentials with the USD at the front-end of the curve have turned very euro-supportive in recent sessions." After gaining as much as a third of a percent in early European trade the euro was just 0.2 percent lower at $1.1257 by 1124 GMT. "There are a lot of people scratching their heads at why the euro is not lower than it is," said Adam Myers, senior currency strategist with Credit Agricole in London. "One idea is that there is demand from central banks propping it up."
Another trader said the Swiss franc's weakening against the euro on Monday suggested the Swiss National Bank was buying euros again, although there has been much talk and no hard evidence of it doing so in the past couple of months. The dollar had firmed in Asian trade as traders braced for the outcome on Wednesday of the US Federal Reserve's two-day policy meeting. The greenback briefly spiked to a session high of 123.81 yen immediately after Bank of Japan Governor Haruhiko Kuroda said he was not making any assessment on nominal yen levels or predicting its future moves in comments to parliament last week.
It was last up 0.1 percent at 123.43 yen. Expectations of monetary policy divergence continue to favour the dollar over the yen and the euro. The Bank of Japan remains on course to expand its monetary stimulus in October, according to a recent Reuters poll. But a hawkish US policy statement is far from a given. US data overnight showed that industrial production unexpectedly fell in May. "While we also believe that the Fed will lay the foundation for tightening, it would be remiss to not discuss the downside risks for the dollar," Kathy Lien, managing director of FX strategy for BK Asset Management, wrote in a note to clients.
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