The dollar stepped back on Tuesday after nearing a 13-year high against a basket of currencies as traders bought back the euro, long depressed by expectations of aggressive policy easing from the European Central Bank.
The dollar index slipped 0.2 per cent to 100.00 after having climbed to as high as 100.31 on Monday, within a whisker of the March peak of 100.390. A break there would take it to highs not seen since April 2003.
The euro rose 0.2 per cent to $1.0585 from a 7 1/2-month low of $1.05575 touched on Monday, as hefty option-related bids at $1.05 kept traders from selling down the currency further.
Last month, the euro had suffered a 4.0 per cent drop — its worst in eight months.
“The market is in a chicken race to sell the euro. Everyone is selling the euro while looking for a timing to buy it back,’’ said Masatoshi Omata, senior manager of market trading at Resona Bank.
ECB stimulus
Selling the euro against the dollar has been one of the most crowded trades since ECB President Mario Draghi had signalled in October that the central bank will unleash another stimulus at its policy meeting this Thursday.
That makes a sharp contrast to the Federal Reserve, which has signalled a strong inclination to raise US rates this month.
The dollar also slipped 0.3 per cent against the yen to 122.70 yen, with some traders pointing to a media report that Japan's giant public pension fund started currency hedging as helping the yen.
Antipodean currencies
Antipodean currencies also outperformed the greenback, with the Australian dollar rising 0.7 per cent to the A$0.7284 .
The currency maintained firmness after the Reserve Bank of Australia (RBA) kept interest rates on hold as expected and dropped no fresh hint of easing.
The New Zealand dollar jumped to a one-month high of $0.6647.
China manufacturing PMI
Two manufacturing surveys from China highlighted continued sluggishness in the world’s second-largest economy which will likely prompt more stimulus but signalled no alarming weakness.
The Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI) edged up to 48.6 in November, contracting for the 9th straight month but beating market expectations of 48.3, fuelling hopes that the economy may be slowly levelling out.
The reading of the official factory PMI shrank to a three-year low.
Yuan inclusion in SDR basket
Outside of the G10 currencies, the Chinese yuan eased 0.2 per cent after the International Monetary Fund admitted the Chinese currency to its benchmark Special Drawing Rights basket.
The yuan, also known as the renminbi, will have a 10.92 per cent share after a review of the weightings formula for the SDR, which also cut the euro’s share by more than 6 percentage points.
“The weightage assigned to the renminbi, while slightly higher than that of the yen and sterling, underwhelms somewhat market expectations and the IMF staff estimate of 14-16 per cent,’’ said Andy Ji, Asian currency strategist at Commonwealth Bank.