The dollar was put under renewed selling pressure late in the US session on Thursday and struggled to make a significant recovery on Friday with a notably soft tone against the yen.
There was an article from Wall Street Journal Fed watcher Hilsenrath suggesting that the Federal Reserve would keep policy on hold at next week’s policy meeting. This element was not surprising and offered nothing new with no expectations for a change at this meeting. More importantly, there were also suggestions that there would be a revision to forward guidance with a potentially more dovish stance. This could include a new lower inflation band and higher unemployment threshold for increasing interest rates.
The comments, overall, increased expectations of a more dovish slant to the forthcoming Fed meeting and weakened the dollar sharply on speculation that bond tapering would be delayed. The Euro pushed to highs near 1.33 as the dollar dipped to five-week lows on a trade-weighted basis.
The latest Japanese inflation data was slightly stronger than expected with national core prices rising 0.4% in the year to June which suggested that deflation pressures may be easing slightly, although the gain primarily reflected yen losses and rising energy costs rather than structural factors.
After initially weakening, the yen regained some ground as the dollar dipped to lows below 98.50. Any further evidence of rising prices and easing deflation would increase speculation that the Bank of Japan would not need to be as aggressive on monetary policy.
Market conditions were generally subdued during European trading with a lack of fresh incentives. The European Commission approved Greece’s latest loan tranche which had been expected and the prime focus was on positioning and technical factors ahead of the weekend.
There was inevitably a sense of caution given key central bank meetings taking place next week with the ECB and Bank of England announcing their latest rate decisions as well as the Federal Reserve. EUR/USD continued to probe resistance levels near 1.33 without being able to break higher while GBP/USD hit further selling pressure above 1.54. There was an upward revision to the University of Michigan consumer confidence index to a fresh six-year high which underpinned sentiment.
The IMF issued a further warning over the difficulties in ending quantitative easing and suggested that it may be preferable to wait until 2014 before reducing purchases. Although the dollar was able to stabilise against European currencies, there were further losses against the yen as USD/JPY dipped to lows just below 98. EUR/JPY also dipped to test support near 130.