Yen gains as RBA, Riksbank decline to join hawks

An unchanged stance on Australia's interest rates from its central bank dominated major currency markets on Tuesday, pushing the Australian dollar lower and helping drive a bounce for the yen from seven-week lows.

Along with the US dollar, the yen suffered last week from a shift towards tighter monetary policy by central bank officials outside the United States and many had expected the RBA to fall in line with the trend.

But the Aussie central bank's neutral stance on rates and statement were broadly unchanged and the Aussie dollar, up in earlier trade, sank in response.

Sweden's Riksbank also stuck to forecasts for rates not to rise until the middle of next year and said it did not rule out a cut in rates in the near term, pushing its crown currency lower.

“The fact that the RBA didn't meet the expectations for a shift to more hawkish rhetoric was a big driver,” said Lee Hardman, an analyst with Japan's MUFG in London.

“If the yen has weakened in the past week it has been on the idea that the central banks were shifting to a more hawkish stance. And obviously this goes in the other direction.”

The yen, also helped by a flight to safety after a missile launch by North Korea, rose around a third of a per cent against both the dollar and the euro.

The Aussie, which hit almost four-month highs in last week's moves, fell 0.7 per cent on the day to $0.7610. While the dollar slipped against the yen, it stood firm against other rivals.

The dollar index against a basket of six major currencies was steady at 96.254 after rising 0.6 per cent overnight as a stronger-than-expected rise in the June Institute of Supply Management (ISM) national factory activity index propelled the 10-year Treasury yield to its highest since May 16.

Monday's developments helped the dollar index bounce back from a 9-month low of 95.470 plumbed on Friday.

The greenback was hit hard last week as expectations increased that central banks in Europe and Canada would eventually shift to tighter monetary policy.

“The dollar's latest rise is driven by direct demand, as opposed to the U.S. currency gaining thanks to the weakness of its peers,” said Shin Kadota, a senior strategist at Barclays in Tokyo.

“Expectations towards the Federal Reserve hiking interest rates later this year had perhaps sunk too low. We are now seeing such lowered expectations being reversed a little.”

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