The safe-haven yen and Swiss franc retreated against the dollar on Monday, as risk sentiment improved after a week of turmoil on hopes major central banks would launch fresh stimulus measures to lift their sluggish economies. The Japanese currency fell for a third straight session versus the greenback, while the Swiss unit slid to a two-week low against the dollar.
Optimism about government action to calm US recession concerns, triggered by last week's inversion of the bond yield curve, grew ahead of the Federal Reserve's symposium later in the week in Jackson Hole, Wyoming, where analysts said central bankers could announce new measures.
China also unveiled interest rate reforms expected to lower corporate borrowing costs, which helped lift the market's mood, while the prospect of Germany's coalition government ditching its balanced budget rule to take on new debt and launch stimulus steps also boosted risk appetite.
"We think the more accommodative central bank backdrop should help insulate the downside in risk markets," said Mazen Issa, senior FX strategist at TD Securities in New York.
In afternoon trading, the dollar rose 0.3% against the yen to 106.66 yen, helping push the dollar index 0.2% higher on the day to 98.358.
Scotiabank, in a research note, said the dollar/yen pair is showing signs of stabilizing from a technical viewpoint, but the longer-run indicators remain bearishly aligned for the greenback.
"We would prefer to see additional dollar gains through the close of this week to confirm last week's reversal and think a daily close above 106.80 yen... would support the outlook for dollar strength," the bank said.
The euro, meanwhile, fell 0.1% versus the greenback at $1.1079, after falling 1% last week, its biggest weekly drop since early July.
Against the Swiss franc, the dollar climbed 0.3% to 0.9816 franc. Sight deposits at the Swiss National Bank posted another big weekly rise, indicating more intervention from policymakers.
Investor optimism is likely to be capped before a speech by Fed Chairman Jerome Powell later this week at the Jackson Hole conference.
Strategists believe his comments will be aimed at reassuring nervous markets that the Fed will remain in an easing stance and set the stage for more rate cuts after a quarter-percentage-point rate cut in July.
"The Jackson Hole summit would be the perfect venue for the Fed to set or reset market expectations," said Kathy Lien, managing director of FX strategy at BK Asset Management.
"If they're committed to lowering interest rates in September, we should hear central bankers downplay the improvement in spending and retail sales." Money markets are pricing in a cumulative 67 basis points of rate cuts from the Fed by the end of the year.