Dollar falls, Dollar hits new pandemic highs ahead of key meeting

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Dollar falls, Dollar hits new pandemic highs ahead of key meeting

HONG KONG, January 18, Reuters - The yen was higher ahead of the outcome of a central bank policy meeting on Tuesday, while the dollar ignored the U.S. Treasury yields hitting new near two-year highs on their return from a long weekend break.

The Bank of Japan will probably revise its inflation forecast in a quarterly outlook after the meeting due to rising energy costs, according to sources, though the new projection will still be below the BOJ's 2% target.

The meeting is expected to wrap up by late in the morning in Tokyo.

The dollar fell by 0.15% against the yen in early trading to 114.43 yen per dollar, and was slightly softer against the pound and euro.

The short end of the curve hit new pandemic highs, which would normally be supportive for the dollar, which caused the weakness in the dollar to happen even as the U.S. Treasury yields gained.

Two-year yields rose above 1% at the open in Asia for the first time since February 2020, as trading returned to normal after a U.S. holiday, and five-year yields rose 3.6 bps to 1.5960%, the highest since January 2020.

The dollar index, measured against six peers, has lost 0.52% since the beginning of the year, with traders expecting the Federal Reserve to hike interest rates as soon as March.

Ray Attrill, head of FX strategy at National Australia BankAustralia Bank, said that the dollar is a screaming buy relative to yields, or there is a lot of dollar supportive news priced in.

He said investors reacting early to the fact that the dollar has historically peaked around the time the Fed raised rates, or they were trading in anticipation of a surge in global economic growth. He said he was not convinced by either argument.

The euro was on the front foot at $1.1416, while sterling was steady at $1.3657 after an early rally in both currencies at the beginning of the year petered out late last week.

As the pound has been boosted by aggressive Bank of England tightening expectations, analysts at ING said they thought any weakness would be contained due to political uncertainty in Britain where Prime Minister Boris Johnson is facing calls to resign.

There isn't a major economic data for the euro zone this week, but investors will focus on speeches by European Central Bank President Christine Lagarde, other ECB members and minutes of the central bank's December policy meeting on Thursday.

The Aussie dollar AUD D 3 was steady at $0.722.

The price of virtual currency was in the doldrums at $42,353, after hitting its record high of $69,000 in November.