By Kevin Buckland
TOKYO (Reuters) – The U.S. dollar hovered near a more than seven-month high to the Japanese yen on Thursday after the heads of the respective central banks reaffirmed the stark divergence in their policy paths at a European Central Bank (ECB) conference overnight.
The Chinese yuan weakened toward a seven-month trough despite the People’s Bank of China (PBOC) setting a much stronger than expected official rate, in the latest signal of its discomfort at the pace of recent declines.
Federal Reserve Chair Jerome Powell – speaking on a panel with ECB President Christine Lagarde, Bank of Japan (BOJ) Governor Kazuo Ueda and Bank of England Governor Andrew Bailey – noted that two rate rises were likely this year, and did not rule out the possibility of a hike in July.
By contrast, Ueda reiterated that “there’s still some distance to go” in sustainably achieving 2% inflation accompanied by sufficient wage growth, the conditions the BOJ has set for considering an exit from ultra-easy stimulus.
The dollar’s surge of as much as 11.55% since late March to reach 144.62 yen on Wednesday for the first time since Nov. 10 has prompted increased verbal warnings from Japanese government officials this week that the move may have been too rapid.
The ministry of finance and BOJ intervened in the currency market last autumn when the dollar strengthened beyond 145 yen.
The U.S. currency was about flat at 144.52 late in the Asian day, but earlier strengthened as far as 144.60.
For intervention, “the threshold may be higher this time because there’s just less public criticism of yen weakness right now,” due to a backdrop of a rising stock market, lower energy price pressures, and the return of foreign tourists, said Shinichi Kadota, senior FX strategist at Barclays in Tokyo.
“I’m not going to rule anything out, because they always try to surprise” when they intervene, he added. “But for it to have a sustainable effect, the underlying driver – which is monetary policy – also has to turn … and that monetary policy divergence is unlikely to change anytime soon.”
The U.S. dollar index – which measures the currency against six major peers, including the yen, euro and sterling – gained 0.22% to 103.20, extending its 0.46% overnight climb.
The euro slid 0.25% to $1.08845, following Wednesday’s 0.45% slide. Sterling edged down 0.13% to $1.2620, extending the previous session’s 0.88% tumble.
The dollar added 0.3% to 7.2619 yuan in the offshore market, taking it close to the previous day’s 7-1/2-month low of 7.2694.
The PBOC set the midpoint rate at 7.2208, in what analysts at Citi called “the most forceful sign yet of official discomfort at the pace of yuan depreciation,” although adding they are “doubtful this will prevent more upside, as it has proven ineffective over time in the past.”
Elsewhere, the Australian dollar largely shrugged off stronger than expected retail sales data for May earlier in the day to last trade 0.2% higher at $0.66135, regaining some composure following Wednesday’s 1.27% tumble.
The Reserve Bank of Australia decides policy next week, and a sharp drop in headline inflation in a report released on Wednesday saw traders paring the odds of another rate increase to just one-in-three currently.
(Reporting by Kevin Buckland; Editing by Shri Navaratnam and Mark Potter)
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