The dollar was on solid footing on Monday, after a bigger-than-expected increase in US jobs suggested the Federal Reserve would stick with its tightening plans for the rest of this year. US job growth surged more than expected in June and employers increased hours for workers, suggesting the Fed could stick to its plan for its third interest rate hike this year and begin to reduce its balance sheet despite sluggish wage gains and tepid inflation.
Against the yen, the dollar was 0.2 percent higher at 114.16, after notching a high of 114.21, its loftiest level since May 11. The dollar index, which gauges the greenback against a currency basket, was steady at 96.012. "The solid jobs report gives us more reason to expect the Fed to announce that it's prepared to start trimming its balance sheet," said Mitsuo Imaizumi, Tokyo-based chief foreign exchange strategist for Daiwa Securities.
"By contrast, the Bank of Japan is nowhere near a policy exit, and it's taking steps that weaken the yen," he said. On Friday, the BoJ sought to keep Japanese government bond yields near its policy target, embarking on a special market operation as well as increasing the size of its regular JGB purchase operations.
BoJ Governor Haruhiko Kuroda on Monday reiterated in a speech at a quarterly meeting of the central bank's regional branch managers that the central bank is resolved to maintain its massive stimulus programme until inflation is stably above its 2 percent target. Data released on Monday showed Japan's core machinery orders unexpectedly tumbled in May and the government downgraded the outlook for orders for the first time in eight months, raising doubts about the strength of the country's economic recovery.
Recent positioning data showed that some investors pared their long dollar positions ahead of the jobs report, amid concerns that a spate of lacklustre data would prompt the Fed to alter its hawkish plans. Speculators this week slashed net long bets on the US dollar to their lowest since mid-May 2016 in the week ended July 4, according to calculations by Reuters and Commodity Futures Trading Commission data released on Friday.
The value of the dollar's net long positions dropped to $135 million, from net longs of $4.5 billion the previous week. The latest week marked the first time since mid-April 2016 that net long dollar positioning fell to under $1 billion. A majority of foreign exchange strategists polled by Reuters were less bullish on the dollar than at the start of the year and more optimistic about the euro.
Still, higher US Treasury yields underpinned the dollar. The benchmark 10-year US yield stood at 2.389 percent in Asian trading, not far from its US close of 2.393 percent on Friday, when it touched a more than eight-week high of 2.398 percent after the jobs report. "Ultimately, the broader theme remains in play, and that is volatility remains really low," said Sue Trinh, head of Asia FX strategy at Royal Bank of Canada in Hong Kong. In such a climate, investors are more apt to do carry trades, in which they borrow lower-yielding currencies such as the yen to buy higher-yielding ones.
The euro edged down slightly on the day to $1.1404 but gained against its Japanese counterpart. The euro was 0.3 percent higher at 130.20 yen, after rising as high as 130.275 yen, its highest since February 2016.
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