By Alun John
LONDON (Reuters) – The Japanese yen steadied on Tuesday while the dollar rose against most currencies, with some of the more pronounced moves of recent days reversing somewhat and a semblance of placid returning to markets.
The dollar last traded at 144.75 yen, up 0.6% on the day. It was the first day this month the greenback has appreciated against the Japanese currency, but it has still fallen by about 9 yen over the past week.
The reassessment also took place in stock markets. Japan’s stock index gained 10% on Tuesday after falling 12% the day before, while European shares also tried to rebound. [MKTS/GLOB]
“We think markets have been a bit more worked up and have seen that this morning, which is why the dollar has strengthened and the greenback has risen against the yen,” said Nick Rees, currency analyst at Monex Europe.
The yen’s recent gains have been fueled by a rise in volatility that has prompted investors to pull out of once-popular carry trades, a move that was reinforced by the Bank of Japan’s interest rate hike on Friday.
This, coupled with weaker-than-expected U.S. jobs data (also released on Friday) and disappointing earnings results from substantial tech companies, led to a global sell-off in stocks, further fueling the pullback from the carry trade.
The Swiss franc weakened on Tuesday, while the dollar rose 0.25% to 0.8541 francs.
Like the yen, the franc is the preferred currency for funding carry trades. It has strengthened sharply since mid-July when those trades were completed, with gains fueling safe-haven flows on Monday.
The dollar also gained against the euro and pound, with the common currency losing 0.4% to $1.09108, after hitting a seven-month high of $1.1009 during Monday’s unrest.
“The dollar didn’t behave like a safe-haven currency on Monday and you can’t invest everything in the franc or the yen, and the next currency on that list is usually the euro,” Rees said.
The pound fell 0.66% to $1.269, hitting a five-week low, as the Bank of England’s rate cut last week undermined one of the pillars of its strength at the start of the year.
Movements in the currency market are also based on traders’ attempts to price in the US Federal Reserve’s policy at upcoming meetings.
Traders now expect 110 basis points (bps) of easing from the Fed this year, pricing in a roughly 70% chance of a 50-bps cut in September. Traders fully priced in a 50-bps cut on Monday.
U.S. central bank policymakers on Monday dismissed the view that weaker-than-expected July jobs data meant the economy was in recession and free fall, but they also warned that the Federal Reserve would have to cut interest rates to avoid such a scenario.
The Australian dollar last fell 0.25% to $0.6479, after earlier rising on comments from Reserve Bank of Australia Governor Michele Bullock, who suggested interest rate cuts were still a ways off.
As expected, Australia’s central bank kept interest rates unchanged on Tuesday, while stressing that it did not rule out any action to control inflation.
