Authors: Hannah Lang and Alun John
NEW YORK/LONDON (Reuters) – The dollar held steady on Wednesday, boosted by higher U.S. yields ahead of key inflation data later in the week and a strengthening Japanese yen as peaceful market conditions encouraged investors to resume trading carry trade type.
The dollar rose as high as 157.41 yen on Wednesday early in the week before slowly returning to levels that led to likely interventions by Tokyo in tardy April and early May, although it rose at a much slower pace than last month.
The last price was 157.275 yen, up 0.06% on the day.
“Overall, for Asian currencies, the post-CPI relief is starting to fade as U.S. monetary easing expectations fade and some tough bond auctions push yields higher again, putting the yen under pressure,” Simon said Harvey, Director of Currency Analysis at Monex Europe.
Slightly milder U.S. consumer price inflation data this month weakened the dollar overall. However, U.S. Treasury yields have since risen again, with the benchmark 10-year yield hitting a nearly four-week high at 4.57%.
A delicate auction of two-year and five-year bonds on Tuesday, which raised questions about demand for U.S. government debt, and data showing U.S. consumer confidence unexpectedly improved in May, drove the rise in yields.
The last position was 104.83, an augment of 0.16%. A report on the U.S. Personal Consumer Expenditures (PCE) Core Price Index – the Federal Reserve’s preferred measure of inflation – will be released on Friday. It is expected to remain stable on a monthly basis.
Apart from the Japanese yen, “most foreign currencies have strengthened… against the U.S. dollar since mid-April,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. “I think this move is over and we should look for the dollar to rebound.”
The Chinese-exposed dollar fell 0.32% to $0.6628, even after Australian consumer price inflation unexpectedly rose to a five-month high in April, raising the risk of another local move interest rates. [AUD/]
In the case of the yen, there has also been a carry trade, in which investors borrow money in a low-yielding currency to invest in higher-yielding instruments.
“The yen remains under significant downward pressure and the appetite to move the currency is heightened due to low exchange rate volatility,” Derek Halpenny, head of global markets research for EMEA at MUFG, said in a note, pointing to elevated levels in euro/yen and pound sterling/yen.
The euro fell in European trade in response to regional inflation data in Germany, falling to a nearly two-year low of 84.84 pence in the pound.
This was followed by a rebound after nationwide data showed that German inflation rose slightly more than expected in May, to 2.8%, although this is unlikely to be a level that will in any way disrupt expectations of a European Bank rate cut Central next month.
The common currency was last flat against the dollar at $1.0834.
The pound was slightly weaker against the dollar at $1.274, reaching its highest level in two months the day before.
