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Tokyo - The dollar added to a two-week gain against the yen amid speculation the Federal Reserve will signal policy makers are on course to raise interest rates while the Bank of Japan will expand stimulus at their respective meetings this week.
The yen is the worst performer among 16 major peers this month. Thirty-two of 41 respondents surveyed by Bloomberg forecast the BOJ will ease monetary policy at its meeting on July 28 to 29.
Hedge funds and other large speculators increased net positions that would benefit from a stronger dollar versus eight major currencies to the most in a month, according to the Commodity Futures Trading Commission.
"The dollar is underpinned by recovering investor confidence in the US economy and corporate earnings which are slightly strengthening expectations for a rate hike this year," said Koji Fukaya, the Tokyo-based chief executive officer at FPG Securities. "While there is risk the BOJ may disappoint, the US factors will likely limit the dollar’s downside."
The dollar was little changed at ¥106.16 as of 6:42 a.m. in London, maintaining a 5.6% advance in the last two weeks. The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, was little changed after posting its best week in two months with a 0.8% advance.
Gauging growth
US payrolls climbed the most in eight months in June, a labour department report showed July 8. Gross domestic product expanded at a faster pace in the second quarter from the previous three months, according to a Bloomberg survey before an initial reading on July 29.
About a quarter of S&P 500 Index companies have released quarterly earnings figures so far, of which 82% exceeded profit forecasts.
In the futures market, dollar net long positions increased to 111 931 contracts as of July 19, from 96 234. This measure was net bearish as recently as May 17. Bullish bets on the yen fell to 39 353 contracts, CFTC data showed.
Many positioning
“The problem is, if the BOJ do under-deliver, there’s a lot of positioning out there at the moment, particularly from fast-money FX accounts but also some real money accounts,” Laura Fitzsimmons, vice president for rates and foreign-exchange sales, at JPMorgan Chase, said on Bloomberg Television.
"Dollar-yen is actually going to be on the decline again back towards 100" in the next few months, she said.
Fed funds futures trading suggests a 10% chance the Fed will raise rates this week, with a 45% probability of an increase by year-end.
Malaysia’s ringgit declined for a sixth day, its longest stretch of losses since November, spurred by speculation the Fed will use this week’s meeting to prepare markets for an interest-rate increase.
The ringgit fell 0.6% to 4.0815 versus the greenback. The New Zealand dollar slid 0.1% to 69.91 US cents.
If the Fed adopts a hawkish tone and the BOJ eases this week, the dollar will test last week’s high, FPG’s Fukaya said. Even if US policy makers sounds dovish and the BOJ forgoes action this week, expectations of further easing later in conjunction with the Japanese government’s fiscal stimulus will probably limit the greenback’s decline to around ¥104, he said.
