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FOREX-Dollar drops to 7-week low; yen rallies on expected inflows
August 7, 2013 / 8:21 PM / 4 years ago

FOREX-Dollar drops to 7-week low; yen rallies on expected inflows

* Dollar slips vs yen after stops triggered below 97.50 yen
    * Sterling at 1-1/2-month high after BoE inflation report
    * Market prices in earlier-than-expected sterling rate hikes

    By Gertrude Chavez-Dreyfuss and Wanfeng Zhou
    NEW YORK, Aug 7 (Reuters) - The dollar fell to a seven-week
low against major currencies on Wednesday, stung by steep losses
against the yen and sterling, on concerns about the scope and
timing of the Federal Reserve's eventual tapering of its
bond-buying program.
    The yen rose to a seven-week peak against the dollar on
expectations that Japanese investors would convert overseas
earnings ahead of a mid-August holiday. The Bank of Japan
concludes its two-day monetary policy meeting on Thursday.
    Sterling climbed to a 1-1/2-month high against the greenback
after investors brought forward expectations of when the Bank of
England will raise interest rates from a record low after a news
conference by the central bank's head.
    "Dollar sentiment hasn't been the same since last week's
tepid U.S. jobs report, which suggested the Fed would move more
patiently to slow a stimulus program that has long been a thorn
in the dollar's side," said Joe Manimbo, senior market analyst
at Western Union Business Solutions in Washington, D.C.
    "A slower U.S. data calendar this week also hasn't offered a
fresh impetus for investors to bid the dollar higher," he said.
    The dollar index, which measures the greenback against a
basket of currencies, was down 0.4 percent at 81.271,
after it earlier touching a seven-week low of 81.239. The index
was down for a fourth straight session.
    However, the dollar's losses could be limited, especially in
the wake of comments on Tuesday from Chicago Fed President
Charles Evans, a voting member of the Fed's policy-setting
committee, who said the U.S. central bank will probably scale
back bond buying later this year. 
    Reduced bond purchases by the Fed could lead to higher U.S.
interest rates, a potential draw for would-be dollar buyers.
    The yen, which is valued as a safe-haven currency, made
broad-based gains against major currencies as global stock
markets fell. Japanese stocks dropped nearly 4 percent.
  
    The dollar came under pressure as a break of 97.50 yen
 sparked stop-loss dollar selling, which drove the dollar
to a low of 96.30 yen, its lowest level since June 20. It was
last trading down 1.4 percent at 96.41 yen.
    BNY Mellon's indicators showed that the yen has been the
most in-demand currency for the last seven days, with buying at
three times the pace of average yen flows over the past year.
    The euro was down 1.1 percent against the yen at 128.62 yen
. Against the dollar, it was up 0.2 percent at
$1.3338.
    Businesses in Japan shut for several weeks around mid-August
for the Obon holidays, and market participants expect yen demand
from Japanese investors to rise ahead of big capital inflows
from interest payments on the country's massive U.S. Treasury
debt holdings at around the same time.
    The pound rose 0.9 percent against the dollar to $1.5490
, recovering from an intraday low of $1.5205 plumbed
shortly after the BoE's inflation report on Tuesday, which tied
future rate rises to a drop in unemployment. 
    At a news conference on Wednesday, BoE Governor Mark Carney
said future interest rate rises in the UK would not happen until
unemployment fell to 7 percent, something seen unlikely for at
least three years. But markets concluded that given a slew of
recent upbeat British data, unemployment could come down faster
than the BoE's three-year timeframe.
    After the bank's report, overnight indexed swaps
 priced in a 90 percent chance of a rate hike from
the current 0.5 percent in three years' time, and some chance of
a hike as early as 2015. Within four years, swaps priced in an
increased probability of two 25-basis-point rate hikes. 
    "Market participants are currently observing a situation
where the data suggests a better economic outcome than they
expected just a month or two ago," said Bob Lynch, head of G10
FX strategy for the Americas, at HSBC in New York.
    "In a data-dependent world, markets will not be complacent
and accepting of central bank forecasts when current data
suggests otherwise."

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