THE greenback held firm on Wednesday (May 29), boosted by higher US yields, and gained on the Japanese yen as placid markets encouraged investors to resume carry trades, while the euro digested German inflation data.
The US dollar reached as high as 157.41 yen early on Wednesday, inching back to levels that led to bouts of likely intervention from Tokyo at the end of April and early May, albeit rising at much slower pace than it did last month.
It was last at 157.10 yen, steady on the day.
“Generally, across Asian currencies, that relief rally post-CPI (consumer price index) is starting to fade, as US easing expectations are trimmed and some rocky bond auctions cause yields to climb back up, placing the yen and Chinese yuan under pressure,” said Simon Harvey, head of FX analysis at Monex Europe.
Slightly softer US consumer price inflation data this month weakened the dollar across the board. Since then, however, US Treasury yields have resumed their climb, with benchmark 10-year yields their highest in almost four weeks at 4.57 per cent.
A lacklustre auction of two-year and five-year notes on Tuesday – that raised doubts about demand for US government debt – and data which showed US consumer confidence unexpectedly improved in May were the drivers of the move higher in yields.
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The dollar was up 0.12 per cent on the yuan traded offshore at 7.2774, a six-week high.
“That continued weakness in the yuan is having knock-on effects on G10 currencies. Today’s Australian inflation data should have been overwhelmingly positive for the Australian dollar,” said Harvey.
The China-exposed Aussie dollar was down 0.3 per cent at US$0.663, even after Australian consumer price inflation unexpectedly rose to a five-month high in April, adding to risks that the next move in local interest rates might be up.
Also in the mix for the yen was the carry trade, where investors borrow in a low-yielding currency to invest in higher yielders.
“The yen remains under considerable downward pressure, with carry appetite elevated due to low FX volatility,” said Derek Halpenny, head of research for global markets Europe, the Middle East and Africa at MUFG in a note, pointing to elevated levels in euro/yen and sterling/yen.
The euro spent European trading reacting to German regional inflation data, dropping to a near two-year low on the pound at 84.84 pence.
It then recovered after nationwide data showed German inflation rose slightly more than expected to 2.8 per cent in May – though a level that is unlikely to do anything to disrupt expectations for a European Central Bank rate cut next month.
The common currency was last flat versus the dollar at US$1.0856, on track for its first monthly gain this year, and up a fraction on the pound at 85.15 pence.
The pound was a touch lower on the dollar at US$1.2750, having hit a two-month high the day before, leaving the dollar index flat at 104.67. REUTERS
