US dollar drops against yen, investors pare June rate hike expectations

[LONDON] The dollar fell against the yen on Wednesday, pulling away from a one-month peak set at the start of the week, after soft US data prompted investors to reconsider hopes about whether the Federal Reserve will raise interest rates in June or not.

Data released on Tuesday showed US consumer confidence dipped while a survey on business activity in US Midwest also underwhelmed. That did not bode well for the Institute of Supply Management's manufacturing survey due later in the day, with traders saying that a weak reading could see chances of a June rate hike recede further.

According to CME Group FedWatch programme, investors are pricing only a 22.5 per cent probability of a rate move in June, down from around 32 per cent factored in earlier in the week. Subdued risk sentiment and worries about whether Britain will vote to stay in the European Union or not later this month also buoyed the safe-haven yen.

The dollar shed 0.8 per cent to 109.835 yen, weakening from Monday's peak of 111.455 yen, which had been the greenback's strongest level since late April.

The yen's rise came on a day when Japanese Prime Minister Shinzo Abe is expected to formally announce a delay to a scheduled sales tax hike.

"There is some position adjustment taking place with the delay in the sales tax hike almost priced in by investors," said Yujiro Goto, currency strategist at Nomura.

"Also for the dollar, the soft data is weighing and if the ISM manufacturing survey is below expectations, then we could see it having a negative impact on dollar/yen."

Mr Abe told members of his ruling Liberal Democratic Party (LDP) on Wednesday that he will delay the tax by two and half years, the Kyodo news agency reported. The premier is due to hold a news conference at 0900 GMT.

Since a delay in the sales tax hike is widely expected, one focus is whether that will be accompanied by more fiscal spending and how that affects Tokyo shares and risk sentiment.

"The market is kind of looking at between 5-10 trillion yen (S$62-125 billion)," said Tan Teck Leng, FX strategist for UBS Wealth Management in Singapore, referring to expectations on the possibility of an extra Japanese budget.

If any supplementary budget were to come in at the lower end of expectations, there could be some disappointment, Mr Tan added.

Against a basket of six major currencies, the dollar fell 0.2 per cent to 95.70, pulling away from a two-month high of 95.968 set on Monday.

The Australian dollar pushed higher after the country's first-quarter growth exceeded market forecasts and prompted investors to scale back expectations for the Reserve Bank of Australia to lower rates soon.

The Aussie dollar rose to US$0.7300, pulling away from a 2-1/2 month low of US$0.7145 set last week. The currency last traded at US$0.7255, up 0.3 per cent.

REUTERS