Monday, 12 September 2016

Dollar steadies as investors await speech from Fed’s Brainard

The dollar was nearly flat against the yen and euro during Asia trade on Monday, with the U.S. currency lacking clear direction ahead of a speech by a key member of the U.S. Federal Reserve.

The U.S. dollar USDJPY, -0.17% changed hands at ¥102.52, compared with ¥102.55 late Friday in New York. The euro EURUSD, +0.1068% strengthened slightly to $1.1242 midday from $1.1236.

The WSJ Dollar Index BUXX, -0.01% a measure of the dollar against a basket of major currencies, was down 0.03% at 86.48.

“What we are seeing is a tug-of-war” between the dollar buying on speculation about U.S. tightening and yen buying on risk aversion, said Yuzo Sakai, manager of FX business promotion at Tokyo Forex & Ueda Harlow.

More specifically, Sakai said investors are buying the U.S. currency following recent hawkish comments from Fed officials. Eric Rosengren, the president of the Federal Reserve Bank of Boston, said Friday that “a reasonable case can be made” for tightening interest rates to avoid overheating the economy.

Meanwhile, a risk aversion mood is prevailing after stocks in the U.S. dropped more than 2% Friday and due to tension over North Korea’s fifth nuclear test. As a result, investors have been buying yen.

On Monday, stocks slid in Tokyo with the benchmark Nikkei Stock Average NIK, -1.76% falling nearly 2% by late afternoon, which also spurred yen buying.

Investors are now waiting for by Fed governor Lael Brainard’s speech due later Monday which is scheduled to come just a day before the Fed goes into blackout mode before the Federal Open Market Committee meeting of Sept. 20-21, said Sakai and other market watchers in Tokyo.

“There are quite a lot of investors who expect the Fed will likely give a message to the market,” via Brainard, who is known as a proponent of keeping rates low, said Takuya Kanda, senior researcher at Research Institute in a morning note.

“I do expect only a small chance that the Fed will go ahead with a rate increase this time,” said Kanda, pointing to recent weak economic indicators. Still, investors are mindful of the possibility of a September rate increase, should the Fed official emit any hawkishness. That said, any resulting slide in U.S. stocks would amplify traders’ sense of risk, triggering yen buying, he said.

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