Dollar stands tall; euro pressured ahead of ECB meeting, yuan volatile

The dollar edged up to a fresh 8-1/2-month high against a basket of global currencies on Monday, while the prospect of further stimulus this week by the European Central Bank kept the euro on the defensive.

The dollar index added about 0.1 per cent to 100.12 after earlier rising as high as 100.23, closing in on a 12-year high of 100.39 set in March. It was up more than 3 per cent for the month, and nearly 11 per cent for the year.

“The euro has a high weighting in the dollar index, so when the euro falls, the index tends to rise,’’ said Ayako Sera, a senior market economist with Sumitomo Mitsui Trust in Tokyo.

Euro vs dollar

The euro inched down about 0.1 per cent to $1.0583, moving back toward last week’s low of $1.0565 — a level not seen since April. It was down nearly 4 per cent for the month and more than 12 per cent in 2015 so far.

Against the yen, the euro was down about 0.2 per cent at 129.90, not far from a seven-month trough of 129.67 set on Friday.

Soft inflation readings out of the euro zone on Monday and Tuesday could strengthen the expectations for ECB action at its December 3 policy review, but whatever the outcome, an easing appeared to be fully factored in.

“The ECB is likely to announce more monetary stimulus at their policy meeting on Thursday, which should see EUR/USD end the week lower and generate a drag on AUD/USD,’’ said Richard Grace, chief currency and rates strategist at Commonwealth Bank.

Fed rate hike

In contrast, the Federal Reserve is widely tipped to hike US interest rates at its mid-December policy meeting, though Fed Chair Janet Yellen could use a speech on Wednesday to steer markets either way.

Also on Friday, the key US payrolls report will be even more closely watched than usual. It could cement expectations that the Fed will deliver its first hike in almost a decade, or lead investors to pare back dollar bets.

The diverging monetary policy pathways between the ECB and the Fed have led to an increase in bullish bets on the US currency.

According to data from the Commodity Futures Trading Commission released on Friday, speculators further increased long dollar positions in the week through November 17 to their highest in eight months.

Sterling at 7-month low

The pound sterling, meanwhile, slipped to a seven-month low in Asian trading on Monday, on expectations that the Bank of England will leave interest rates alone.

The BOE will meet on Tuesday, and is seen as likely to increase banks’ capital reserve requirements, but any tightening is expected to be modest and not involve raising interest rates.

Sterling fell as low as $1.5015, its lowest against the dollar since April 23, and was last buying $1.5025.

Against the yen, the dollar was steady at 122.75, still in consolidation mode after reaching a three-month peak of 123.77 on November 18. It was on track to rise 1.7 per cent in November, and is up 2.5 per cent so far in 2015.

BOJ policy stimulus

Bank of Japan Governor Haruhiko Kuroda told business leaders on Monday the central bank won’t hesitate to further ease monetary policy to achieve its two per cent inflation goal quickly, and that stable yen moves were desirable.

Japanese economic data released early on Monday were upbeat, in contrast with weak price and spending data released last week. Japan’s industrial output rose for a second straight month in October and retail sales grew much faster than expected.

Yuan choppy ahead of IMF decision

The Reserve Bank of Australia and Bank of Canada will also review their policies this week, with both expected to keep rates unchanged.

A private-sector survey of prices showed on Monday that Australian inflation stayed subdued in November, underscoring that the RBA still has plenty of room for further rate cuts even if a move is considered highly unlikely this week.

All 24 economists polled by Reuters see the central bank standing pat at a record low of 2.0 per cent on Tuesday.

The Aussie was just a tad under 72 U.S. cents, having retreated from last week's high of $0.7283. The Canadian dollar stood at C$1.3377 per USD, nursing Friday's 0.7 percent fall on softer oil prices.

The offshore Chinese yuan rebounded from early lows by more than 300 pips against the dollar on Monday, with traders suspecting Beijing intervention. In less volatile onshore trade, the yuan fell to a three-month low of 6.3918 to the dollar.

The International Monetary Fund is expected to agree on Monday to add the yuan to its Special Drawing Rights (SDR) basket, acknowledging the Chinese unit as a major global currency alongside the dollar, euro, yen, and pound.

Some traders expect Beijing may allow the yuan to depreciate after being admitted to the SDR basket, partly to reflect China's slowing economic growth. Bearish views on the currency rose to their highest in three months, according to a Reuters poll last week.

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