Dollar steady as investors ponder over global rates, economic outlook

By Rae Wee

SINGAPORE (Reuters) – The dollar held near a one-week high against its major peers on Monday as traders weighed the impact of protracted monetary tightening cycles on the global growth outlook and as worries over a deep downturn in major economies lingered.

Investors were also on guard after dramatic weekend events in Russia, though reaction in the currency market was subdued as they assessed the implications of the aborted mutiny.

The euro was nursing its losses from last week and was last up 0.07% at $1.0902 in Asia trade.

The single currency had fallen to a one-week low on Friday after data showed that euro zone business growth virtually stalled in June amid a deepening downturn in manufacturing activity and a slow expansion of the bloc’s dominant services industry.

Sterling rose 0.1% to $1.27285, reversing some of its 0.8% fall last week after an outsized 50-basis-point rate increase from the Bank of England stoked fears of a British recession.

Flash Purchasing Managers’ Index (PMI) data on Friday showed Britain’s economy displayed signs of a slowdown this month but inflation pressures stayed high.

Meanwhile, U.S. business activity fell to a three-month low in June and the contraction in the manufacturing sector deepened, though the overall picture indicated economic growth ticked up a notch in the second quarter.

“Again, (there was) another set of weak PMI data coming out of Europe,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia (OTC:CMWAY) (CBA). “By contrast, PMI data in the UK and the U.S. continue to be pretty solid in the face of aggressive interest rate hikes.

“The aggressive monetary tightening in the major economies … will likely continue to see the global economy continue to deteriorate, which will underpin the safe haven U.S. dollar.”

Against a basket of currencies, the U.S. dollar steadied at 102.71, after a gain of more than 0.5% last week, its first in nearly a month.

Elsewhere, the Japanese yen rose 0.3% to 143.27 per dollar, though was not far from an over seven-month low of 143.87 hit on Friday.

A summary of opinions of the Bank of Japan’s (BOJ) June policy meeting showed that a board member said the central bank should discuss revising its yield curve control policy at an early stage.

The yen has come under renewed pressure in recent weeks amid the stark contrast between the BOJ’s ultra-dovish stance and hawkish central banks elsewhere.

Japan’s top currency diplomat Masato Kanda said on Monday authorities will respond to any excessive moves in the currency market, warning that recent yen moves were “rapid.”

RISKS ABOUND

Traders were also closely monitoring developments in Russia, after heavily armed Russian mercenaries withdrew from the southern Russian city of Rostov under a deal that halted their rapid advance on Moscow but raised questions on Sunday about President Vladimir Putin’s grip on power.

The risk-sensitive Australian dollar slipped 0.07% to $0.66745, while the kiwi rose 0.19% to $0.61555.

“If the situation in Russia sharply deteriorates, that can abruptly weigh on currencies like the Aussie, so that is something that we’ll continue to watch,” said CBA’s Kong.

China also returns from a holiday on Monday, with markets on the alert for further support measures from Beijing to stimulate the country’s faltering economic recovery.

The offshore yuan languished near a seven-month low at 7.2162 per dollar.