The dollar hit its lowest in seven weeks on Tuesday, dipping below 100 yen for the first time since June as traders reined in US interest rate hike bets following dovish comments from a Federal Reserve policymaker. The greenback also fell another 1 percent against the commodity-linked currencies most associated with growth and greater risk-taking by investors world-wide.
The dollar has been under pressure for the past week as the perceived chances of a US rate rise this year took a knock from several batches of data and the tone taken by some Fed policymakers. The trigger for overnight weakness was a paper from San Francisco Fed President John Williams arguing that central banks might have to raise inflation targets, focus more on growth and back much looser fiscal policy in future.
To market ears, that all added up to a strong argument for keeping rates unchanged for the foreseeable future and the dollar fell 1 percent against yen and around half a percent against the euro as Asian and European markets came back online. "The Williams paper yesterday was pretty dovish, so people are selling dollars. Dollar yields are lower pretty much across the curve since the release," said Citi strategist Josh O'Byrne.
Speculation of further aggressive monetary easing by Tokyo that would weaken the yen was quelled at last month's Bank of Japan meeting, and speculation on the chances of the government launching direct intervention in the FX market has also eased.
"There is this feeling that Japan may not have that much left up its sleeve and the Fed does seem to be backing off," said O'Byrne. "...People in general are talking about (intervention) a lot less. Verbal intervention really stepped up when we were seeing fast moves in the yen, and this has been more of a grind, so it's harder for them to argue that there have been disruptive markets."
Adding to the weakness has been funding pressures which have forced short-term dollar interest rates in the market to their highest since 2009, causing companies to shift loans into other cheaper currencies like the euro and yen. The dollar traded as low as 99.855 yen, its lowest since the day after Britain voted in June to leave the European Union. It also hit a seven-week low of $1.1280 per euro, and fell 0.75 and 1.1 percent respectively against the Australian and New Zealand dollars.
Hans Redeker, head of G10 currency strategy at Morgan Stanley in London, cited "additional catalysts coming from China where entities there are reducing dollar loan exposure". Against a basket of six major currencies, the dollar lost 0.6 percent to 95.051. Markets will look to US data later in the day, including consumer prices, housing starts and industrial output, for another chance to gauge the health of the economy.
But the Williams paper ups the stakes for markets around next week's annual meeting of officials in Jackson Hole. If others on the Fed board head in a similar direction, it would be liable to again push back expectations for any further tightening of policy.
Heng Koon How, a senior FX investment strategist for Credit Suisse in Asia, said the dollar would probably fall further against the yen in coming months, with the yen supported by Japan's rising current account surplus.
"Key risk to our view for more yen strength is of course more aggressive easing by the Bank of Japan when they next meet," said Heng, who expects the dollar to be trading at 96 yen three months from now. "But so far this year, they have disappointed and failed to turn around sentiment," he added.
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