The dollar inched away from a one-month low against a basket of currencies on Tuesday but was expected to struggle on expectations US monetary policy will stay loose until the economy shows a sustained recovery. The dollar index rose 0.1 percent on the day to 82.296, having touched a low of 82.047 on Monday, which was its weakest since June 21.
Analysts said the dollar was still likely to strengthen in the coming months, against currencies such as the euro, sterling and the yen as the Fed is expected to be the first major central bank to make its policy less accommodative. But some said the dollar's rise would not be smooth. "What we have seen over recent weeks is that tapering (stimulus) is different from raising rates and the pace of tapering will depend on the evolution of the US economy," said Sara Yates, global currency strategist at J.P. Morgan Private Bank. "We expect the dollar to modestly outperform major currencies but are not looking for very aggressive moves."
Benchmark US 10-year Treasury yields, which have had a robust correlation with the dollar index, have slipped in recent weeks. They last stood at 2.5143 percent, slightly up on the day but well below the 2.755 percent hit on July 8, their highest since August 2011. Yields have fallen as top Fed officials have stressed that the timing of any reduction in the central bank's $85 billion monthly asset purchases would depend on economic data. The dollar was up 0.3 percent at 99.97 yen, recovering from a one-week low of 99.14 yen hit earlier. "One of the reasons we have been hanging around 100 yen and not breaking up to 102 and higher is because we don't have enough strength in the dollar to do that," said Jane Foley, senior currency strategist at Rabobank.
She expected the dollar would rise gradually to 105 yen in 12 months, rather than any more rapid move. Analysts said Japanese Prime Minister Shinzo Abe's decisive upper house election win last weekend would pave the way for pro-growth fiscal policies and for further Bank of Japan monetary easing, which would weaken the yen. The dollar is up more than 15 percent versus the yen this year and the recent slide dollar/yen has likely bottomed out, according to trends in the options market. The euro was flat at $1.3180 but close to Monday's one-month high of $1.32185. Markets will focus on flash Purchasing Managers' Index data on Wednesday as, despite the euro's recent resilience, worries about euro zone economies are re-emerging. Analysts said any rebounds in the euro would probably be sold into. Analysts said the onset of holidays had reduced volumes and volatility and this could see most currencies trading in ranges.