Dollar at 10-day lows, no respite for yen after BOJ hikes as expected
By Ankur Banerjee
SINGAPORE, June 16 (Reuters) – The dollar held near 10-day lows on Tuesday as a deal to end the Iran war buoyed risk appetite, while the yen teetered near the key 160 level after the Bank of Japan hiked rates in a widely telegraphed move to tame inflationary risks from the conflict.
U.S. President Donald Trump said a preliminary agreement to end the war in the Middle East has been signed by the U.S. and Iran. Details have yet to be made public but that didn’t stop global markets from cheering and sending oil prices down.
Investor attention this week is on a slew of central bank meetings with the Bank of England and the U.S. Federal Reserve also due in coming days to gauge if the end of the conflict has come too late to ease near-term inflation concerns.
The Bank of Japan raised interest rates to a 31-year high on Tuesday as widely expected. But the board’s 7-1 vote was noted by market analysts, suggesting some uncertainty over the timing of the next hike.
“The only dissent on the rate was Asada’s on dovish grounds … with the path from here made explicitly conditional on the Middle East and the oil pass through, a still wide rate differential with the U.S. will struggle to support yen,” said Kieran Williams, head of Asia FX at Intouch Capital Markets.
Over the medium term the pressure on the yen is unlikely to ease on the rate hike alone, he said, “leaving intervention risk as a live near-term risk. Uchida’s presser is the swing factor, how he frames the pace of the next hike will be in focus.”
The focus now switches to Deputy Governor Shinichi Uchida’s press briefing at 0630 GMT, where he is likely to reiterate the BOJ’s resolve to continue raising rates, but avoid giving explicit hints on timing.
The yen was at 160.29 per U.S. dollar, giving up small gains it had built up ahead of the decision.
The yen has hovered near the 160 milestone in recent days that has kept traders wary of another bout of interventions from Tokyo, with even the peace deal unlikely to provide relief for the battered yen.
The Australian dollar was down 0.3% at $0.705, holding to its losses as the Reserve Bank of Australia left rates unchanged in a unanimous decision after three consecutive hikes even as inflation remains elevated.
The RBA said inflation was still too high and it would do whatever necessary to bring it down “including increasing the cash rate target further if required.”
Matt Simpson, a senior market analyst at StoneX, said traders are not ’buying’ the RBA’s mildly hawkish tone where the Australian dollar is concerned.
“Given soft employment and growth, the only reason it is hawkish at all is to not undo the work of the last three hikes,” Simpson said, noting that the Middle East peace deal is keeping the Aussie supported.
PEACE DEAL LIFTS SENTIMENT BUT DOUBTS LINGER
The U.S.-Iran agreement would extend a tenuous ceasefire announced in April by another 60 days and reopen the Strait of Hormuz, which Tehran has effectively blocked since the U.S. and Israel attacked Iran in February.
The currency market reaction was constrained compared to other parts of the market as traders awaited comments from central bankers across the globe this week.
The euro was at $1.1577, below the 10-day high of $1.1622 it touched on Monday. Sterling last bought $1.3392 on Tuesday.
The dollar index, which measures the U.S. currency against six other units, was at 99.76. The index is up 2% since the conflict first erupted at the end of February in a volatile reaction to a fragile ceasefire and regular tit-for-tat attacks.
Questions around supply chain normalization are likely to keep investors on edge with the near-term pathway for inflation and interest rates still uncertain.
ING analysts said the market reaction has been faster than realities on the ground, and it can be altered by the prospects of a deal.
“A more durable repricing requires safe, predictable and insured shipping through the Strait of Hormuz,” they said in a note. “And demand could likely be higher than usual as depleted reserves need to be replenished. Re-escalation risks are reduced, but not off the table.”
