Cautious optimism supports dollar ahead of ECB meet

Reuters SINGAPORE | Updated on September 11, 2019

Fragile investor confidence supported the dollar and weakened the yen on Wednesday but currency markets kept to tight ranges ahead of series of major central bank meetings over the next week.

Investor focus for now is centred on the European Central Bank's meeting on Thursday, which is expected to push interest rates even further into negative territory.

The ECB could set the tone for upcoming rate-setting decisions by the US Federal Reserve and the Bank of Japan next week, and for the broader global risk appetite.

For now, a cautious risk-on mood has prevailed after political crises that had hobbled markets, from Britain to Hong Kong, abated, taking the shine off safe-haven assets.

Bonds slid overnight and the yen hit 107.65 per dollar, its lowest since August 1.

Overhanging the relief buying, however, are signs of a slowdown in global demand, which have offset recent positive developments in US-China trade negotiations.

The euro, which has shed 3% since June, was flat at $1.1047. The dollar was flat against the Australian dollar at $0.6860 and steady on the yen and the New Zealand dollar.

“Expect a quiet day of trading, with some support of risk, as a broader cyclical rotation continues,” Australia and New Zealand Banking Group analysts said in a note. “Speculation over whether the ECB will enact a new QE programme on Thursday continues to ebb and flow.”

ECB policy makers are leaning toward a package that includes a rate cut, a pledge to keep rates low for longer and compensation for banks over the side-effects of negative rates, five sources familiar with the discussion said last week.

On the other hand, concerns have been building that global central banks are reaching the limits of their stimulus options, especially those with negative interest rates and sub-zero long-term sovereign bond yields.

“Given the chance that the ECB fails to match market expectations for easing policy, the balance of risks favours higher EUR/USD and European FX outperformance,” ING forex strategists said in an overnight note.

Much of the positive mood in recent days has been driven by optimism that a high-level meeting of US and Chinese negotiators at Washington next month can deliver some sort of trade-war circuit breaker.

That was tamped down somewhat by White House trade advisor Peter Navarro on Tuesday, when he urged patience about resolving the two-year trade dispute between the world's two largest economies and said to “let the process take its course.”

But the prospect of a breakthrough stoked appetite for Asian currencies such as the trade-exposed South Korean won, which drifted higher in Asian trading hours and to around 1189.50 per dollar, close to its highest since August 2.

The yen, already under pressure as investors spurned safe havens, was further sold overnight after Reuters reported BOJ policy makers are more open to discussing the possibility of expanding stimulus at their board meeting on September 18-19.

And the pound has held on to last week's gains after British parliament passed a law compelling Prime Minister Boris Johnson to seek a delay to the October 31 date for leaving the European Union. Sterling last traded at $1.2353.

Published on September 11, 2019

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