The differing messages of the world's major central banks on inflation and monetary policy prodded the dollar and euro higher against the yen on Monday, with traders eyeing a series of appearances by US Federal Reserve officials this week. Fed chief Janet Yellen's confidence as her team raised interest rates for the third time in six months last week surprised investors who had expected more caution about the economy.
There are signs, however, that the market does not believe Fed forecasts that show it will be able to continue raising rates later this year and any signs of doubt from other Fed officials speaking this week may hurt the dollar. The dollar was down just under 0.1 percent against the basket of currencies that measures its broader strength in morning trade in London.
"I think that the burden of proof for the dollar (to appreciate) is pretty high," said Jeremy Stretch, head of currency strategy at CIBC in London. "Even if there isn't going to be any outright criticism of Yellen, if you don't think US (10-year government bond) yields are going to be above 2.20 percent then it is tough to buy into it." US market interest rates point to a less than 40 percent chance of the Fed hiking rates once more by December and data on Friday showed investors had further reduced net bets on the dollar gaining ahead of last week's Fed meeting.
Friday's Bank of Japan meeting, however, played down even the chance of it beginning to reduce emergency stimulus for the economy and the yen was again weak on Monday, down 0.1-0.2 percent against the dollar and euro. The positioning data also showed net bets on the euro at their highest in seven years and there was no discernible boost for the single currency from French President Emmanuel Macron's landslide in parliamentary elections on Sunday.
"There are signs that the market may have gotten ahead of itself on the euro in the short-term," said Societe Generale analyst Alvin Tan, pointing to the positioning numbers. "Euro-dollar is also higher than expected from rate differentials We would thus temper our bullish medium-term euro view with short-term caution." Against the dollar, the euro was 0.1 percent higher at $1.1210 after gaining about 0.5 percent on Friday.
Sterling also inched higher around the formal start of negotiations on Britain's planned exit from the European Union. Speculation that a surprise election result earlier in June could generate a drift towards a "soft Brexit" has given the currency some support although many analysts expect newsflow from the talks to hurt.
"While medium-term (sterling) appreciation is still likely, the tail risks of a no-deal or disorderly Brexit scenarios have increased, and should weigh on (the pound)," currency strategists from Barclays wrote in a note to clients. Prime Minister Theresa May is also still struggling to secure the support of Northern Ireland's DUP party which she needs to proceed as a minority government after losing her majority 10 days ago. The pound gained 0.2 percent to $1.2802 by 1105 GMT.