Yen gains as US dollar holds loss after Fed hike odds scaled back

[SYDNEY] The yen gained and a gauge of the US dollar held its first decline in four days after Federal Reserve governor Lael Brainard said the case for the central bank to raise interest rates is "less compelling".

The Japanese currency added to Monday's gains as the market-implied probability of a US rate hike this month dropped to 22 per cent from 30 per cent at the end of last week. The greenback weakened against most of its 16 major counterparts on Monday following Ms Brainard's comments in Chicago, which were the last before the Fed enters its quiet period during which officials abstain from publicly speaking about monetary policy in the run-up to their Sept 20-21 meeting.

"Dollar-yen is obviously one of the most Fed-sensitive currency pairs," said Sean Callow, a senior currency strategist at Westpac Banking Corp in Sydney.

"In the wake of Brainard's speech, and with looming data likely to tilt to the soft side, we expect pricing for Fed tightening to wane further."

The yen appreciated 0.3 per cent to 101.55 per US dollar as of 11:33am in Tokyo, adding to Monday's 0.8 per cent advance. The Bloomberg Dollar Spot Index, which tracks the currency against 10 peers, was little changed Tuesday after dropping 0.3 per cent in the previous session.

South Korea's won climbed 0.3 per cent to 1,110.18 per US dollar, halting a three-day loss. Malaysia's ringgit retreated 0.8 per cent to 4.1015 versus the greenback as domestic financial markets reopened after a holiday on Monday.

Australian Dollar

The Australian dollar pared losses after China's economy showed signs of rebounding as factory output, investment and retail sales all exceeded economist estimates. The Aussie, a bellwether for sentiment toward China, was 0.2 per cent lower at 75.48 US cents after dropping as much as 0.3 per cent.

The currency has failed to depreciate by as much as the Reserve Bank of Australia expected in response to weaker commodity prices and a record-low domestic cash rate, assistant governor Christopher Kent said at a Bloomberg event in Sydney, citing very easy and unconventional policies elsewhere in the world.

The Fed's Brainard counselled continued prudence in the move toward tighter US policy, even as she acknowledged that the world's largest economy was making gradual progress toward achieving the central bank's goals.

Her comments came after financial markets were jolted out of a period of relative calm by concern some central bank officials globally are questioning the ability of loose policy to ignite price growth and support economic expansion.

"Brainard was known to be a dove, and this speech was extremely dovish," said Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp in New York.

"The upshot is that investors seem close to certain that the Fed will forgo a rate hike next week, and that's weighing on the dollar."

BLOOMBERG