Currency mired near 3-week low, Aussie pares post-RBA losses

folarin okunola

August 2, 2016 5:25 PM

The dollar index against a basket of six major currencies stood at 95.642, having fallen to as low as 95.384 last week when it posted its biggest fall in three months.

A customer counts his U.S. dollar money in a bank in Cairo, Egypt March 10, 2016. E REUTERS/Amr Abdallah Dalsh/File Photo

The dollar hovered near three-week lows on Tuesday after soft U.S. economic data undermined the case for an early Federal Reserve rate hike, while the Australian dollar slipped briefly after the Reserve Bank of Australia cut interest rates.

The index has struggled to stage a meaningful recovery since the release of very weak U.S. economic growth data for the June quarter late last week.

Monday's weaker-than-expected manufacturing data continued to hold the greenback down. The influential Institute for Supply Management's (ISM) index of national factory activity dropped to 52.6 in July from 53.2 in June, below market expectations of 53.0.

Fed funds futures are pricing in less than a 40 percent chance of an interest rate hike by December.

The dollar eased 0.1 percent to 102.25 yen. The dollar fell to 101.97 yen on Friday, its lowest level in about three weeks, after the Bank of Japan disappointed markets with an easing measure that was much less aggressive than expected.

Japanese Prime Minister Shinzo Abe is also due to formally unveil his economic package on Tuesday, which is expected to include 7.5 trillion yen of fiscal spending, though this is not expected to affect the yen much.

"The size and rough contents of the package are already known so I doubt it will move markets. The dollar/yen is likely to fall unless there are clearer signs of a rate hike by the Fed," said Shinichiro Kadota, senior FX and rates strategist at Barclays Securities Japan.

The yen had a limited reaction to a selloff in Japanese government bonds (JGBs), which came under pressure after the BOJ said last week it would re-evaluate its policies, spooking investors who saw it as a tacit admission that easing could be reaching the limit of its effectiveness.

The euro edged up 0.2 percent to $1.1183.

The Australian dollar briefly slipped below 75 U.S. cents after the RBA cut interest rates by 25 basis points to 1.50 percent as widely expected.

The Aussie later pared its losses, however, and was last up 0.1 percent at $0.7545, having slipped to as low as $0.7486 after the RBA decision.

Whether the RBA cuts interest rates further later this year is likely to hinge on moves in the Australian dollar, said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.

"I don't think the message is that they are done cutting interest rates. My interpretation is that they could do so again if the Australian dollar were to strengthen," Murata said.

While expectations of a rate cut have dented the Aussie dollar, the currency remains relatively well-supported due in part to its relatively high yield versus its developed-market peers.

The Aussie 10-year bonds yield stood just above 1.8 percent , compared with 1.5 percent for its U.S. counterpart and below zero percent in Japan and Germany.

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