Friday, 5 May 2017

Dollar takes breather after Fed-inspired rally

The dollar hit a six-week high against the yen on Thursday, after the U.S. Federal Reserve downplayed weak first-quarter economic growth and was seen as leaving the door open to raising interest rates in June.

The Fed kept interest rates unchanged on Wednesday while emphasizing the strength of the labor market - a sign it was still on track for two more rate rises this year.

The central bank said consumer spending continued to be solid, business investment had firmed, and inflation has been "running close" to its target.

The dollar rose to 112.89 yen earlier on Thursday, its strongest level in more than six weeks. It later pared those gains and last traded at 112.76 yen, little changed from late U.S. trade on Wednesday.

The U.S. currency benefited as the Fed kept the door "wide open" to a June rate hike, said Mitul Kotecha, head of Asia macro strategy for Barclays in Singapore.

"The risk was that they could have perhaps sounded a little bit more dovish on the back of the recent data and that certainly wasn't the case," he added.

Private reports released on Wednesday supported the notion that the U.S. economic expansion remains on track despite a weak first quarter. U.S. companies hired workers at a slower but still-solid pace in April while the services sector grew more than expected, the reports showed.

The euro edged up 0.1 percent to $1.0895, regaining a bit of ground after falling 0.4 percent on Wednesday.

The euro has lost some steam after scaling a 5-1/2 month high of $1.0951 last week, when it rallied on relief over centrist Emmanuel Macron's victory against anti-euro nationalist Marine Le Pen in the first round of France's presidential elections. The runoff vote is on May 7.

An opinion poll showed that Macron was found more convincing than Le Pen in Wednesday's televised debate, reinforcing his status as favorite to win the second round of the election on Sunday.

"I think markets have largely already priced in a Macron win," said Kotecha at Barclays, adding that the latest poll result was unlikely to have much of an impact on the euro.

Investors are awaiting Friday's monthly U.S. non-farm payrolls report, for further hints on the Fed's likely rate hike trajectory through the end of the year.

"There's been some dollar-buying globally," said Satoshi Okagawa senior global markets analyst at Sumitomo Mitsui Banking Corporation, referring to the market reaction after the Fed meeting.

However, there is still uncertainty as to whether the economy is really on track for the Fed to raise interest rates twice more this year and to begin reducing its balance sheet, either in late 2017 or next year, Okagawa added.

The Australian dollar touched its lowest level in nearly four months at $0.7407. It was last trading at $0.7423, little changed on the day.

The Australian dollar is down about 0.9 percent so far this week, largely due to a shakeout in Aussie long positions.

Reference: Masayuki Kitano

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