Home ForexArticles The dollar takes a break, the BOJ and the ECB are among its priorities By Reuters

The dollar takes a break, the BOJ and the ECB are among its priorities By Reuters

by SuperiorInvest

© Reuters. FILE PHOTO: U.S. dollar bills are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

By Vidya Ranganathan and Alun John

SINGAPORE/LONDON (Reuters) – World currencies stabilized on Monday as looming central bank decisions in Japan and Europe and faltering market expectations of U.S. Federal Reserve rate cuts forced a pause in trading. the dollar’s rally this year driven by data.

The Japanese yen was one of the biggest movers, moving away from Friday’s 148.80 per dollar, its weakest level in a month, to just 147.74, when the Bank of Japan began its monetary policy meeting in two days.

Bets on an exit from negative rates at this meeting have dissipated following the New Year’s Day earthquake off the west coast of Japan, along with dovish comments from the BOJ.

The currency, which is sensitive to the difference in interest rates between the United States and Japan, has been the hardest hit against the dollar this year, falling about 5% in a rapid reversal of December’s rebound to near five-month highs. of 140.

“The policy convergence story sent the dollar tumbling against the yen toward the end of last year, and after the New Year we’ve seen some reversal because market expectations for Fed rate cuts have been delayed a bit and expectations for a BOJ rate have eased a bit. The hike has also been delayed,” said Shusuke Yamada, chief Japan currency and rates strategist at BofA.

“We have the BOJ tomorrow, and I think the market wants to see the outcome before doing anything (more),” he said, adding that he did not expect “anything major from the BOJ tomorrow.”

Traders said one factor driving the yen’s moves was the expiry of a large number of currency options this week and the hedging around those contracts.

LSEG data showed that while most options expiring between Monday and Thursday with strike prices between $147.15 and $148.10 were small, the cumulative amount was around 2.6 billion. Dollars.

The euro was down 0.1% at $1.0888 and the pound was up a fraction at $1.27095. That left the dollar trade-weighted index at 103.24, steady on the day.

The dollar has been the biggest gainer among developed market currencies in January, rising about 1.8% since the beginning of this year, although its rally has been patchy as investors try to decide when the Federal Reserve will begin to cut rates. .

Data late last week showing that U.S. economic activity remains resilient despite interest rates at their highest level in decades caused markets to scale back expectations of rate cuts beginning so soon. like in March.

Interest rate futures show traders are betting that rate cuts will begin in May, not March as they did until last week. Longer-dated Treasury yields have risen steadily, with 10-year yields rising 30 basis points this month.

However, there is a wide gap of about 100 basis points between market expectations and the Fed’s own dot plot of where rates will be at the end of the year.

The ECB follows after the BoJ

There is also a lot to focus on in the markets this week, with the European Central Bank and Canada and Turkey monetary policy meetings on Thursday, a busy earnings season and turbulence in the Red Sea disrupting global trade and supply chains. supply.

Ahead of the ECB policy meeting, the debate has shifted somewhat as policymakers accept that the next step is a rate cut, but later and less than markets expect.

However, market analysts believe the ECB’s inflation and growth outlook is wrong, with market prices currently indicating expectations of five 25 basis point cuts this year.

“The ECB lacks any real hawkish credibility at this stage, given the data, and if some risks remain, these change modestly, so they remain underweight the euro,” analysts at NatWest said in a note.

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