Monetary policy divergence returned to the fore as central bank officials flagging prospects for interest-rate moves spurred the greenback to rebound and killed off a rally in the Aussie.
The Bloomberg Dollar Spot Index added to gains after rising Monday by the most in 1 1/2 weeks when Federal Reserve Bank of New York President William C. Dudley said he’s relatively optimistic that a rebound in U.S. growth will support a decision to raise interest rates later this year. The Australian dollar extended losses after minutes of the central bank’s April meeting underscored comments by Governor Glenn Stevens, who said cuts to borrowing costs remain possible.
“The Fed is not suggesting pushing back the timing of the rate hike further and further, so the dollar is firmly supported,” said Masafumi Yamamoto, a senior strategist at Monex Inc. in Tokyo. “There’s a risk, however, that the first-quarter gross domestic product could be much weaker than forecast, so it’s difficult to buy up the dollar” before the data’s release on April 29.
The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, gained 0.2 percent to 1,193.50 as of 6:47 a.m. in London, after jumping 0.5 percent Monday in New York. The index had fallen for the previous four days as weak data fueled concern about the strength of the U.S. economy.
The Australian dollar fell 0.5 percent to 76.88 U.S. cents, adding to a 0.7 percent tumble yesterday as Stevens said Australia’s currency is “very likely” to drop further, in a speech in New York.
Stevens on Rates
“Interest rates should be quite accommodative and the question of whether they should be reduced further has to be on the table,” Stevens said.
“In considering whether or not to reduce the cash rate further at this meeting, members discussed the various channels through which monetary policy was affecting the economy at present, including the asset price and exchange rate channels,” the minutes of the RBA April 7 meeting released in Sydney Tuesday said.
The RBA held its overnight cash-rate target at a record-low 2.25 percent this month.
“The RBA wants to see more data to see a recovery trend in the non-mining sector, for which a higher Aussie is detrimental,” Yamamoto said. “The RBA seems to want to use verbal intervention while it can, as long as it has an impact on currency rates.”
The U.S. dollar rose 0.3 percent to 119.51 yen, after advancing on Monday for the first time in seven trading days.
Stephen Wood, chief market strategist at Russell Investments in New York, said in a Bloomberg TV interview with Angie Lau on Tuesday that Fed officials are “looking to raise rates towards the back half of this year. That’s creating, I think, upward pressure on the dollar.”
Slower U.S. economic growth in the first quarter can mainly be blamed on weather that was more severe than normal, according to 18 of 37 economists in a Bloomberg survey conducted March 30 to April 1.
The euro slid 0.2 percent to $1.0715 after ending a four-day rally against the dollar yesterday, its longest winning run since April last year. European leaders are wrangling with Greece about how to avoid the country’s default.
The single currency dropped as Greek Prime Minister Alexis Tsipras ordered local governments to move their funds to the central bank to provide cash for salaries, pensions and a repayment to the International Monetary Fund.
“Markets are recognizing Greece as a risk factor as everybody knows the tight financing situation,” said Keisuke Hino, a foreign-exchange trader at Mizuho Bank Ltd. in New York. “Markets expect a default to be avoided but they have to keep the risk in mind.”