US dollar edges down but close to recent highs; Fed, BOJ in focus

JAN 25, 20168:33 AM

[TOKYO] The US dollar edged down on Monday but remained well off recent lows as markets started the week on a calmer note, and investors turned their attention to upcoming central bank meetings.

The US dollar inched down about 0.2 per cent against its Japanese counterpart to 118.57, but remained not far from a two-week high of 118.88 touched on Friday, just a day after it dropped to a one-year low of 115.97.

The US Federal Reserve is widely expected to leave its federal funds rate unchanged at 0.25-0.50 per cent at the conclusion of its policy meeting on Wednesday.

However, the possibility of cooling inflation and recent global market volatility could prompt the Fed to signal concern about the U.S. and world economic outlooks. "Markets are concerned about both continued tightening and a US recession. They likely only need to worry about one," Andrew Sheets, chief cross-asset strategist at Morgan Stanley wrote in a note to clients. "Were the Fed to remind the market that it remains data-dependent, it could temporarily alleviate some of the pressure on USD," Mr Sheets said.

The Bank of Japan will also conclude a two-day policy meeting on Friday, at which sources familiar with its thinking say it is likely to cut its core consumer inflation forecast for the coming fiscal year to possibly below 1 per cent.

While the BOJ is expected to hold steady this week, downbeat economic reports have increased market speculation of more easing steps this year.

Japanese trade data released early on Friday showed exports skidded 8 per cent from a year earlier, a deeper drop than forecast and down for the third straight month as the slowdown in China and emerging markets took a toll.

Fears of the fallout of the slowing growth in China helped send crude oil prices to 13-year lows last week. The risk-averse mood and volatile markets have led investors to pare bets on any more Fed interest rate hikes on the near horizon, and reduce their dollar positions.

Speculators reduced bullish bets on the US dollar for a fourth straight week through Jan 19, as net longs fell to their lowest level since late October, according to Reuters calculations and the latest data from the Commodity Futures Trading Commission released on Friday.

The euro was up about 0.1 per cent at US$1.0793, but not far from a two-week low of US$1.0776 hit on Thursday after European Central Bank President Mario Draghi's unexpectedly strong hints that the ECB could have additional stimulus measures up its sleeve.

Mr Draghi stressed on Friday the outlook for a gradual economic recovery in the euro zone had not changed, and that the bank had plenty of instruments at its disposal to push meagre euro zone inflation levels higher and was both determined and willing to act.

The dollar index , which tracks the greenback against a basket of six major rivals, was slightly lower at 99.530, but still not far from a more than one-month high of 99.790 touched on Thursday.

REUTERS