Dollar seen choppy after bounce; sterling shines

By Ian Chua

SYDNEY (BestGrowthStock) – The U.S. dollar looked set to stay firm in Asia on Wednesday after a strong bounce overnight while stellar UK growth data that diminished chances of more imminent policy easing was likely to keep the pound buoyed.

The squeeze in short dollar positions was driven by growing expectations the Federal Reserve may proceed more cautiously than previously thought, if it launches a new round of monetary easing at next week’s policy meeting, analysts said.

Partly reflecting that caution, U.S. Treasury yields climbed, with the benchmark 10-year yield rising to one-month highs above 2.6 percent.

“The big increase in bond yields is a sign that people are getting a little bit more focused on longer-term inflation and that is implicitly because they think the QE program is going to be successful,” said Joseph Capurso, strategist at Commonwealth Bank in Sydney.

“But between now and the FOMC meeting, you’re going to get a lot of volatility in the U.S. dollar.”

The euro was last at $1.3852, versus $1.3854 late in New York, having fallen to a near one-week low of $1.3823 after breaching support at $1.3866, its 21-day simple moving average. The fall came after repeated attempts to close above $1.4000 failed.

Dealers were unsure what to make of a report in the Financial Times that China and the U.S. had the basis for a pact on rebalancing trade. If true it would be positive for risk trades and likely negative for the dollar.

The dollar fetched 81.32 yen, having risen to an overnight high of 81.65 yen after Japan’s finance minister, Yoshihiko Noda, warned on Tuesday the government would “act decisively” in markets if needed.

Japan intervened to sell the yen in September for the first time since 2004, and markets fear a second round of yen selling if the currency nears 80 per dollar. Traders said Japanese life insurers and banks were among the yen sellers on Tuesday.

“This week’s respite in USD selling is an enigma and may reflect the beginning of a short squeeze rather than a more enduring trend,” said Michael Woolfolk, analyst at BNY Mellon in New York.

The British pound bought $1.5847, having surged toward $1.5900 overnight, bolstered by data showing the UK economy grew a surprisingly strong 0.8 percent. Sterling leaped higher on the euro, knocking the single currency down on a range of crosses.

Cable was also lifted after rating agency Standard & Poor’s revised its outlook on the UK rating to “stable” from “negative.”

Meanwhile, the Aussie steadied just above $0.9850 after finding support at levels close to $0.9800 ahead of consumer inflation data due at 0030 GMT.

A much stronger-than-expected inflation reading could raise the chance of an interest rate hike at next week’s Reserve Bank of Australia meeting, providing the Aussie with fuel for another test at parity, analysts said.

Forecasts center on a rise of 0.7 percent on the quarter, taking the annual figure to 2.6 percent for underlying measures of inflation watched by the RBA, near the top-end of the central bank’s 2-3 percent target.

Traders said a reading of 0.9 percent or higher was needed to trigger fresh gains in the Aussie. Equally, a soft result could see the Aussie test $0.9743 and even $0.9662.

Markets are currently pricing in a 50/50 percent chance of a rate hike at the November 2 meeting.

(Additional reporting by Steven C. Johnson in NEW YORK)

Dollar seen choppy after bounce; sterling shines