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US dollar supported as spotlight falls on monetary policy, inflation puzzle

[TOKYO] The US dollar was buoyant against the yen on Friday as some participants bought back the currency to square positions ahead of a meeting of central bankers in Jackson Hole, Wyoming.

While Federal Reserve Chair Janet Yellen and European Central Bank President Mario Draghi are expected to stay on script in speeches later in the day, investors are hungry for any clues on further US rate rises, the timing of its balance sheet tapering and whether Europe is still looking to rein in stimulus.

Ms Yellen is due to give a speech at 1400 GMT and Mr Draghi will speak at 1900 GMT.

The US currency was a shade firmer at 109.640 yen after gaining 0.5 per cent overnight.

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The greenback was poised to end 0.3 per cent stronger against the yen on the week, during which it had slipped to as low as 108.635 yen on geopolitical tensions stemming from the Korean Peninsula.

Investors' focus for the time being has shifted from geopolitics and political turmoil in Washington to monetary policy.

"The theme at Jackson Hole this year is 'fostering a dynamic global economy' and as such a general title suggests, the market may not get the immediate hints on interest rates it is eager to hear," said Yukio Ishizuki, senior currency strategist at Daiwa Securities.

But as a precaution some speculators appeared to have bought back the US dollar before Jackson Hole, resulting in the US dollar/yen's rise, Ishizuki said.

Price data from Japan highlighted what could be a major topic of discussion at the central bankers' gathering: why are inflationary pressures remaining so stubbornly weak despite a seemingly synchronised global economic recovery?

Japan's core consumer prices inched up for a seventh straight month in July from a year earlier, but the gain was a tepid 0.5 per cent and driven largely by higher fuel bills. The yen showed little reaction.

The euro was 0.05 per cent lower at US$1.1796 following a subdued overnight session, during which it was bound to a tight US$1.1818-1.1784 range. It was on track to end the week with a 0.3 per cent gain.

The common currency awaited ECB Mr Draghi's speech, though most market watchers expect he will drop few hints before the central bank's next policy review on Sept 7, when some expect he will announce plans to start reducing stimulus.

The euro has gained nearly 14 per cent against the US dollar this year and some observers were focusing on whether Draghi would choose to talk down the currency's strength.

"Surprises from Jackson Hole, if any, would probably come from Yellen rather than Draghi, and any impact on the euro would come from moves in the dollar," said Shin Kadota, senior strategist at Barclays in Tokyo.

"Market expectations for a December Fed rate hike have sunk quite low and there is room for improvement."

Fed funds futures implied that traders saw a 42 per cent probability of the Fed raising interest rates at its December meeting, down from around 50 per cent early in July.

The US dollar index against a basket of six major currencies stood little changed at 93.299 after nudging up 0.15 per cent overnight on the back of a rise in US Treasury yields.

The Australian and New Zealand dollars were both steady at US$0.7900 and US$0.7210, respectively.

The kiwi took a hit this week after the New Zealand government downgraded the country's growth outlook for this fiscal year and next. It fell to a two-month low of US$0.7192 on Thursday.