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* Falling currency market volatility boosts risk appetite

* U.S. February CPI data due later in the day

* Graphic: World FX rates in 2018

By Saikat Chatterjee

LONDON, March 13 (Reuters) – The dollar jumped against theyen on Tuesday, nearing a two-week high as the Japanesecurrency was pressured by a political scandal engulfing PrimeMinister Shinzo Abe’s govermment.

The yen weakened by 0.3 to 0.5 percent against other majorcurrencies after Japan’s ministry of finance said on Monday italtered documents related to a discounted sale of state-ownedland to a school operator with ties to Abe’s wife.*:nL3N1QU05E

The dollar is also benefiting from the decline in broadercurrency market volatility which is encouraging investors to addpositions in higher-yielding currencies, though the greenback’sgains were capped before monthly U.S. inflation data.

“The broader story remains that of U.S. monetary policynormalization in the backdrop of an improving economy and afurther decline in currency market volatility would only fuelmore risk taking appetite,” said Commerzbank’s FX strategist ThuLan Nguyen.

The dollar was trading at 106.95 against the yen JPY=EBS ,up 0.5 percent and just below a two-week high of 107.05.

The yen tends to suffer in an environment when riskier andhigher-yielding assets are bid but Morgan Stanley strategistssaid in a note that a further deterioration in the politicalsituation that affected the position of Abe, could see the yen”forcefully return towards its previous upward trend.”

Elsewhere, though the renewed drop in currency volatilityprompted investors to add bets on higher-yield currencies withthe Australian dollar AUD=D3 recovering smartly fromthree-month lows while the euro gaining nearly 2 percent in thelast 10 trading sessions.

The euro EUR=EBS was broadly flat around $1.2329 againstthe dollar on the day.

A key focus for investors is the U.S. CPI data due at 1230GMT. Median forecasts by economists polled by Reuters point toannual core CPI inflation USCPFY=ECI of 1.8 percent inFebruary, which would be flat from January.

A higher reading could stoke expectations that the FederalReserve will likely raise interest rates four times, rather thanthree times, this year.

A rate hike at its upcoming policy meeting on March 20-21has been long considered a done deal while another increase inJune is almost fully priced in.

Yet traders are also mindful that the prospects of more U.S.rate hikes, while theoretically positive for the dollar, may notnecessarily lift the U.S. currency, given other factors weighingon the greenback.

One big issue is U.S. President Donald Trump’s tariff onsteel and aluminium, which many investors worry could triggerretaliatory moves by U.S. trade partners and hurt the economy.

FX market vol

(Reporting by Saikat Chatterjee; Additional reporting byHideyuki Sano and Masayuki Kitano in TOKYOEditing by Andrew Heavens) (([email protected]; +44-20-7542-1713;Reuters Messaging: [email protected]))

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