Thursday, January 21, 2016

FOREX-Dollar firms on divergent monetary policy expectations

The dollar firmed against a basket of currencies on Friday, as rising expectations of monetary easing by other major central banks offset fading chances of more rate hikes from the Federal Reserve.

The dollar index .DXY =USD, which tracks the greenback against a basket of six major rivals, rose about 0.2 percent to 99.260, below Thursday's more than one-month session high of 99.790. But it was still on track to mark a gain of 0.3 percent for the week.

The dollar edged up about 0.1 percent against the yen to 117.80 JPY=[1], on track for a weekly gain of about 0.6 percent.

It remained well above Thursday's session low of 115.97, which was its deepest nadir since January 2015, a move that likely did not go unnoticed by policymakers at the Bank of Japan.

"Given the strength of the yen, there has been some speculation lately that the BOJ has been under more pressure, especially given reports that the BOJ might cut its CPI forecast," said Mitul Kotecha, currency strategist at Barclays in Singapore.

"That's part of the reason why dollar/yen is looking a bit more sticky," he said.

The BOJ is likely to cut its core consumer inflation forecast for the coming fiscal year to possibly below 1 percent at a policy review next week, according to three sources familiar with its thinking.

Japan's central bank is "taking a serious look" at expanding its monetary easing measures as sliding oil prices make it harder to reach its 2 percent inflation target, the Nikkei newspaper reported on Friday.

A stronger yen and falling stock prices will loom large at the central bank's Jan. 28-29 policy meeting, the report said.

The euro slumped about 0.2 percent against its Japanese counterpart to 127.72 EURJPY=EBS after notching a low of 126.17 on Thursday, its lowest since April.

BOJ Governor Haruhiko Kuroda said on Thursday that he is not thinking of adopting a negative interest rate policy now, signalling that any further monetary easing will likely take the form of an expansion of its current massive asset-buying program.

The euro was down about 0.3 percent at $1.0846 EUR=EBS[2], poised for a weekly dip of about 0.7 percent, though it managed to bounce off a two-week low of $1.0776 touched in the wake of European Central Bank President Mario Draghi's comments.

The euro skidded on Thursday after unexpectedly strong remarks from Draghi suggesting the bank could lau nch additional stimulus measures in the euro zone within months, against a backdrop of fading growth and inflation prospects.

"Downside risks have increased again amid heightened uncertainty about emerging market economies' growth prospects, volatility in financial and commodity markets, and geopolitical risks," Draghi told a news conference. "We are not surrendering in front of these global factors."

But the single currency rebounded from its Draghi-triggered lows, partly due to positioning and partly to flagging expectations that more Fed hikes are on the near-term horizon.

"This may be a function of the existing overhang of spec short EUR positions and of course doubts that the Fed will raise rates again any time soon," wrote Sean Callow, senior currency strategist at Westpac in Sydney, noting that only a 22 percent chance of a March hike is priced in.

U.S. data on Thursday reinforced doubts that the Fed would unveil more tightening anytime soon. Weekly jobless cl aims climbed to a six-month peak, raising questions about the strength of the labor market, and factory activity in the mid-Atlantic region contracted for a fifth straight month.

(Editing by Shri Navaratnam and Richard Borsuk)

References

  1. ^ JPY= (www.reuters.com)
  2. ^ EUR=EBS (www.reuters.com)

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