The dollar firmed a little but languished close to 17-month lows against the yen on Friday, with the Japanese currency poised for weekly gains against its major counterparts despite verbal warnings from Japanese officials. Underpinning the greenback, a less cautious tone from Federal Reserve Chair Janet Yellen reminded investors that US interest rate hikes are likely still in the cards this year, and Japanese Finance Minister Taro Aso let them know direct intervention is also possible.
Speaking at a panel with former chiefs of the US central bank, Yellen said late on Thursday that the labour market was "close" to full strength and that inflation was currently held back by temporary factors. She said the economy is on a solid course and still on track to warrant further interest rate hikes.
But the dollar's big picture still shows expectations of waning strength. A Reuters poll of strategists released on Thursday showed the dollar rally that began in mid-2014 has nearly run its course and will only gain slightly over the coming year, with respondents saying risks to their forecasts are tilted more to the downside. Japanese Finance Minister Taro Aso said early on Friday that rapid foreign exchange moves were "undesirable," that the current yen moves were "one-sided," and that Japan would takes steps as needed.
Aso's words helped the dollar gain about 0.4 percent to 108.67 yen after dropping as low as 107.67 on Thursday, its weakest since October 2014. But it was still on track to lose 2.7 percent for the week. While the dollar seems to be getting a lift from position squaring for now, market players are probably looking to sell the greenback on rallies, said a trader for a Japanese bank in Singapore.
The dollar could eventually drop towards levels around 100 yen to 102 yen, a range it was boxed in for some time during 2014, the trader added. Daily charts show the dollar had mostly traded in a range of roughly 100.80 yen to 102.80 from February 2014 to July 2014, although there were occasional rises above the top side in that period.
The euro added about 0.3 percent against the yen to 123.47 yen but was poised to shed around 2.9 percent for the week. While the odds of direct yen-selling foreign exchange intervention have "slightly risen," strategists at ING said they remain some distance away from any material action ahead of a G7 summit that Japan is hosting in May, unless the dollar were to sharply drop into the 100-105 area.
"More aggressive jawboning will be the near-term option to maintain USD/JPY above 105," they said in a note to clients. Another focus for the yen is the Bank of Japan's policy meeting on April 27-28. "We see increased risk of some form of BOJ monetary policy response on April 27-28 to limit yen strength," said Heng Koon How, senior FX strategist for Credit Suisse Private Banking Asia-Pacific.
The risk of yen-selling intervention by Japanese authorities is harder to gauge, Heng added. The euro edged down about 0.1 percent against the dollar to $1.1366 after rising as high as $1.1454 on Thursday, its highest since October. The dollar index, which tracks the US unit against a basket of six rival currencies, was up about 0.1 percent at 94.579, poised for a flat weekly performance.