Dollar extends bounce vs yen on US, Japanese policy expectations

The dollar extended gains against the yen and euro on Monday as US Federal Reserve policymakers took an upbeat tone on the economy and expressed support for a near-term US interest rate hike.

Expectations that the Bank of Japan would not rule out a deeper cut to negative interest rates also weighed on the yen and supported the dollar.

The dollar was up 0.5 per cent at 100.760 yen, pulling further away from an 8-week low of 99.550 struck early last week.

The euro was down 0.3 per cent at $1.1289, adding distance between $1.1366, its highest since June 24 reached on Thursday. The dollar index rose 0.4 per cent to 94.843.

US economy

The market took an early cue from Fed Vice Chairman Stanley Fischer, who had on Sunday gave a generally upbeat assessment of the US economy’s current strength, saying that the central bank is close to hitting its job and inflation targets.

“Fischer’s comments had an impact on dollar/yen as he, along with (New York Fed President William) Dudley, is more influential than the other Fed district heads,” said Masashi Murata, senior currency strategist at Brown Brothers Harriman in Tokyo.

“That said, dollar/yen has not risen much further as much of the momentum appears to be coming from profit taking in the yen, rather than outright buying of dollars.”

Negative rate cut

The yen also sagged after the Sankei newspaper reported over the weekend that the BOJ will not rule out deepening a cut to negative rates, quoting Governor Haruhiko Kuroda.

The US currency was already on the front foot on Friday after San Francisco Fed President John Williams said a rate hike in September should be in play.

The currency market has swayed back and forth over the past week on conflicting views towards US monetary policy.

The greenback initially gained on hawkish comments from New York Fed President William Dudley and Atlanta Fed President Dennis Lockhart, but dollar bulls were disappointed after the July Fed policy meeting minutes suggested the central bank was not in a hurry to increase rates.

Yellen’s speech

Investors awaited Fed Chair Janet Yellen's speech in Jackson Hole, Wyoming on Friday during a global gathering of central bankers for more concrete policy hints.

“Market attention will be squarely focused on U.S. Fed Chair Yellen's speech at Jackson Hole. We believe she may use the opportunity to signal the Federal Open Market Committee's growing confidence in the outlook for activity and inflation," wrote strategists at Barclays.

“Given the low market expectations for a September or December Fed rate hike, a repricing at the front end of the rates curve should drive a near-term rebound in the USD.”

Federal funds futures on Friday suggested traders saw a 53.5 per cent chance of a Fed rate hike this year, up from 48.8 per cent on Thursday, CME Group’s FedWatch programme showed. Expectations for a rate hike in September were even lower, at around 20 per cent.

Britain exit from UK

Sterling was on the defensive after dropping 1 per cent against the dollar on Friday on speculation that Britain could formally begin the process of leaving the European Union early next year.

The pound was down 0.1 per cent at $1.3058 after being knocked away from a 2-week high of $1.3186 on Friday.

The Australian dollar slipped 0.4 per cent to $0.7595 , having touched a 2-week low of $0.7584. The New Zealand dollar shed 0.6 per cent to $0.7228.

The Aussie and kiwi extended losses from Friday, when ratings agency Moody’s cut its outlook on Australian banks to negative, providing investors an impetus to sell both currencies.

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