The dollar steadied on Tuesday after rallying on upbeat U.S. data that boosted Treasury yields to seven-week highs, while the focus turned to the Reserve Bank of Australia’s policy decision to see if it would join a growing list of central banks adopting a hawkish tilt. The dollar index against a basket of six major currencies was a shade lower at 96.125 after rising 0.6 percent overnight as a stronger-than-expected rise in the June Institute of Supply Management (ISM) national factory activity index propelled the 10-year Treasury yield to its highest since May 16.
Monday’s developments helped the dollar index bounce back from a nine-month low of 95.470 plumbed on Friday. The greenback was hit hard last week as expectations increased that central banks in Europe and Canada would eventually shift to tighter monetary policy.
“The dollar’s latest rise is driven by direct demand, as opposed to the U.S. currency gaining thanks to the weakness of its peers,” said Shin Kadota, a senior strategist at Barclays in Tokyo. “Expectations towards the Federal Reserve hiking interest rates later this year had perhaps sunk too low. We are now seeing such lowered expectations being reversed a little.”
The euro was effectively flat at $1.1369 after dropping 0.6 percent overnight. The common currency has taken a step back from a near 14-month high of $1.1445 scaled on Friday. The dollar was down 0.1 percent at 113.270 yen after going as high as 113.480 late on Monday, its loftiest since mid-May.
Pressure against the yen has been mounting as the Bank of Japan is expected to stick with its negative interest rate scheme in order to meet its inflation target while its counterparts seem poised to hike rates or begin exiting their accommodative policies. “The yen is slipping against popular crosses like euro/yen, pound/yen and Aussie/yen, which is contributing to its weakness against the dollar,” said Bart Wakabayashi, branch manager for State Street Bank and Trust in Tokyo.
“And Japanese stocks are managing to hold up, and its easy for dollar/yen to rise in tandem.” The euro edged up to a 16-month high of 128.970 yen, sterling was at a seven-week peak of 146.84 yen and the Aussie touched 86.96 yen, its strongest since March 21.
The dollar dipped to 113.125 yen on news that North Korea launched a missile on Tuesday, which Tokyo said appeared to have landed in its Exclusive Economic Zone (EEZ). But it quickly trimmed most of its losses with the region’s financial markets having become accustomed to Pyongyang’s missile launches. The immediate focus for markets was on the RBA’s policy decision due later in the day.
While the RBA is not expected to hike interest rates this time, some market participants are looking for any signs of the central bank joining a shift towards a hawkish stance by peers like the European Central Bank, Bank of England and the Bank of Canada. Others cautioned against expecting too much from the Australian central bank at this juncture.
“To be hawkish now would be an unnecessary squeeze on the currency and the consumer at a time that neither is required,” wrote Matt Simpson, senior market analyst at ThinkMarkets in Melbourne. The Australian dollar was 0.1 percent higher at $0.7668. The Aussie had surged to a three-month high of $0.7712 on Friday thanks to a bounce by commodity prices and last week’s broad retreat in the greenback.