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ollar near two-year lows vs. euro after Draghi comments

7/21/2017, 1:39:21 PMMarket Analysis
ollar near two-year lows vs. euro after Draghi comments

The dollar headed for weekly losses on Friday, wallowing at its lowest levels against the euro in nearly two years after what markets perceived as hawkish talk from European Central Bank chief Mario Draghi.

But the Australian dollar skidded against the greenback after contrastingly dovish comments from a Reserve Bank of Australia official.

The dollar index, which tracks the U.S. currency against a basket of six major rivals, was flat on the day at 94.322, not far from its overnight low of 94.090, its deepest nadir since August 2016. It was down 0.9 percent for the week.

The euro caught its breath and steadied at $1.1626 after climbing as high as $1.1659 on Thursday, its loftiest level since August 2015.

Draghi said that no exact date had been set for discussing any changes to the ECB's ultra-easy monetary program but did say policymakers would revisit the topic in the autumn.

His comments were perceived as "hawkish, even though the ECB didn't tip its hand as to when it will begin balance sheet normalization and in fact left the door open to additional easing if needed," said Bill Northey, chief investment officer at U.S. Bank Private Client Group in Helena, Montana.

The dollar edged up 0.1 percent against the yen to 112.06, after touching an overnight low of 111.48, its lowest since June 27. It was on track to shed 0.4 percent for the week.

The euro crept 0.1 percent higher against its Japanese counterpart to 130.32 yen, within sight of last week's high of 130.76 yen, its highest since February. It was on track to gain 1 percent for the week.

The dollar's losses against the yen were mitigated by market expectations that the Bank of Japan will keep its massive stimulus program in place far longer than other major central banks amid stubbornly weak inflation.

On Thursday, the BOJ kept monetary policy steady as expected and postponed the timeframe to achieve its ambitious inflation target for a sixth time, though it slightly raised its economic growth forecasts.

Concerns over low inflation will likely keep the Federal Reserve from raising U.S. rates at its policy meeting next week, analysts said.

Fed Chair Janet Yellen signaled caution in her congressional testimony last week, with disappointing U.S. inflation and retail sales data a week ago adding to evidence that the central bank has reason to take its time in tightening even as it has vowed to do so.

"When you look at dollar/yen, the Fed has explicitly said they're on a rate-hiking curve, and the BOJ has said this week that they still have a specific 2 percent inflation figure in mind, and they're going to hit it," said Bart Wakabayashi, branch manager for State Street Bank in Tokyo.

"So I would have expected the dollar to be even higher than where it is against the yen now, and this background is definitely limiting the dollar's losses," he said.

U.S. President Donald Trump's failure to garner enough support for his healthcare bills in the Senate this week also weighed on the dollar, as it raised fears about similar obstacles in passing his stimulus and tax reform agendas.

The Australian dollar plunged after a top central banker said on Friday that the Reserve Bank of Australia doesn't need to follow the leader when it comes to global monetary tightening.

"Just as the policy rate in Australia did not need to decline to the very low levels seen in other parts of the world, the fact that other central banks increase their policy rates does not automatically mean that the policy rate here needs to increase," RBA Deputy Governor Guy Debelle said in a speech in Adelaide.

The Aussie tumbled 0.9 percent to $0.7889 after falling as low as $0.7875 earlier.

The New Zealand dollar added 0.4 percent to $0.7423 after rising as high as $0.7429, its highest level since September 2016, after New Zealand Finance Minister Steven Joyce told Bloomberg in an interview that he was not worried about the strength of the local dollar.