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US dollar underpinned by strong US data, BOJ easing hopes
[TOKYO] The US dollar gave up some of its recent gains against the yen on Wednesday, but it held close to four-month highs against a basket of currencies thanks to strong US data and rising expectations that the Bank of Japan will take additional easing steps.
Commerce Department data showed that US housing starts surged 4.8 per cent to a seasonally adjusted annual pace of 1.19 million units, underpinning a theme of strength in the US economy.
The US dollar edged down 0.2 per cent against the yen to 105.96 yen, after hitting 106.53 yen on Tuesday, its highest level since June 24 when markets were roiled in the wake of Britain's surprise vote to exit the European Union.
Speculators have been unwinding their safe-haven bids in the yen as the initial shocks from the Brexit vote dissipated, and expectations rose of additional easing from the Bank of Japan at its July 28-29 meeting.
A majority of economists polled by Reuters expect further BOJ easing, which will likely consist of a combination of measures.
"If the BOJ doesn't take any action, the dollar/yen can fall back to 100 again," said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo.
"But now the focus has also shifted to the possibility of a US interest hike," he said, which will likely underpin the US dollar even in the event the BOJ decides not to ease this month.
Japanese policymakers won't go as far as funding government spending through direct debt monetisation, but might pursue a mix of aggressive fiscal and monetary expansion to battle deflation, according to sources familiar with the matter.
The US dollar index, which tracks the US unit against a basket of six major rivals, was steady at 97.068, after earlier rising as high as 97.185 earlier in the session, its highest level since March 10.
"The broad sideways movement in the dollar index since March 2105 was primarily a consolidative phase, from which it will launch another leg higher," Marc Chandler, global head of currency strategy at Brown Brothers Harriman, said in a note.
"Our underlying constructive outlook for the US dollar remains intact," he said.
"It is broadly based on the divergence between the US and most other major economies."
Fed funds futures rates show investors see almost a 50/50 chance that the US central bank raises rates by its December meeting, according to CME Group's FedWatch tool, compared with less than 20 per cent a few weeks ago.
The euro was last down 0.1 per cent at US$1.1013, after plumbing a three-week low of US$1.0995 earlier in the session.
The European Central Bank will hold a regular policy meeting on Thursday, its last one before an eight-week summer break. It is not expected to take any additional easing steps.
"For the ECB, if anything, we might see some changes to technical parameters, but nothing much is expected," said Mitul Kotecha, head of FX strategy, Asia-Pacific for Barclays in Singapore.
Some bond traders believe the ECB might address the scarcity of bonds it can buy under its 1.7 trillion euro stimulus programme.