Dollar drifts as traders weigh rate path; yen fragile

By Ankur Banerjee

SINGAPORE (Reuters) – The U.S. dollar was tentative on Monday as investors tried to assess the monetary policy path ahead after a raft of central bank meetings last week, while the yen was fragile in the wake of the Bank of Japan sticking to its ultra-easy policy.

The dollar index, which measures the U.S. currency against six major rivals, rose 0.049% to 102.33, not far from a one-month low of 102 it touched on Friday. U.S. markets are closed on Monday for a holiday.

In an action-packed week of central bank decisions, the Federal Reserve left interest rates unchanged on Wednesday but hinted that further hikes were on the way to tame inflation.

The European Central Bank raised interest rates by 25 basis points on Thursday and left the door open to more hikes, with the Bank of Japan rounding off the week by standing pat on its ultra-easy policy.

“The Fed’s hawkish hold means that the bar to a hike next month is low,” said Marc Chandler, chief market strategist at Bannockburn Forex in New York.

Investors, though, expect the central bank to be done with its tightening in July.

Markets are pricing in a 72% probability of the Fed hiking by 25 basis points next month, CME FedWatch tool showed, and stopping after that.

“The market, which had been pricing in cuts this year until late May still needs to be convinced that the Fed will in fact deliver two more hikes this year,” Chandler said.

Investor focus this week will be on Fed Chair Jerome Powell’s testimony later this week to Congress.

“Congressional testimony next week gives Chair Powell a second chance to push a more hawkish message,” Citi strategists said in a note on Friday.

Fed officials have also struck a hawkish tone since the meeting.

Citi said sustained strength in the economy has raised optimism around a ‘soft landing’ where inflation falls without a recession.

“However, persistently strong core inflation keeps us in the camp of those who think the most likely way inflation returns to target is through a significant downturn in growth.”

YEN SLIDES

As widely expected, the BOJ on Friday maintained its -0.1% short-term rate target and a 0% cap on the 10-year bond yield set under its yield curve control (YCC) policy, pushing the yen broadly lower.

“The BOJ believes Japan’s surge in inflation may not last without monetary policy staying loose,” said Mansoor Mohi-uddin, chief economist at Bank of Singapore.

“We expect the BOJ will lift or end its 10Y yield cap in 2023 as inflation firms. But officials will keep the deposit rate negative to spur growth further.”

On Monday, the yen touched a near seven-month low of 141.98 per dollar, having slid 1% on Friday. The yen also touched a fresh 15-year low against the euro of 155.32.

Meanwhile, the euro was up 0.01% to $1.0934, hovering near a one-month peak. Sterling was last at $1.2817, flat on the day.

The Australian dollar fell 0.32% to $0.686, while the kiwi eased 0.26% to $0.622.