Dollar sell off ebbs, but on track for weekly losses on Fed outlook
The dollar index recovered from a five-month low on Friday, but was still on track for a third straight week of losses, as investors cut favorable bets after the Federal Reserve appeared cautious about raising rates at a steady pace this year. The dollar was flat against the yen, having hit a 17-month low against the yen on Thursday, with traders worried that a sharp rise in the Japanese currency would elicit some kind of intervention from the Bank of Japan.
The dollar was trading at 111.25 yen JPY=, off a low of 110.67 plumbed on Thursday that was its weakest since October, 2014. The euro retreated from a five-week high of $1.1342 EUR=, but was still on track to gain 1.2 percent on the week. All this saw the dollar index .DXY trade 0.25 percent higher at 95.001, having fallen to a five-month trough of 94.578 in Asian trade. It was set to end the week 1.2 percent lower.
"At these levels, the market is nervous about pushing dollar/yen too far lower just in case there is some response from the BOJ," said Yujiro Goto, currency strategist at Nomura.
The dollar has slid sharply since the Federal Reserve lowered its expectations for interest rate increases this year at the midweek Federal Open Market Committee (FOMC) meeting. Treasury yields have dropped sharply since the policy meeting, fuelling the dollar's fall.
"Short-term speculators are leading the action. They appear to be selling the dollar and Japanese stocks in tandem, try- ing to probe for a bottom," said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo. "They are testing to see if the trough of the recent 110-115 yen range can hold," he said.
The dollar's post-FOMC weakness against the yen presents a headache for Japan. The country would like to see the yen remain relatively weak to support its exporters, but the market thinks Japan has to tread carefully lest it is accused of engineering competitive devaluations.
The dollar's weakness poses a challenge to the European Central Bank, too. The ECB eased extensively last week, hoping to weaken the euro somewhat and boost inflation. But some banks are already revising their euro/dollar forecasts higher.