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Dollar finds its feet ahead of BoJ and ECB policy calls

It’s the morning after a long, dark session for the dollar and the world’s reserve currency is finding support.

The sharp slide in the dollar looks to have taken it too far, at least ahead of Thursday’s brace of monetary policy meetings — at the Bank of Japan and the European Central Bank — which could spark further volatility.

The index tracking the world’s reserve currency against six of its rivals is up off the 10-month lows at which it was mired on Tuesday, reaching 94.784, a recovery of 0.2 per cent.

The euro is 0.2 per cent weaker at $1.1525, with the pound down 0.1 per cent at $1.3022. The yen is 0.1 per cent weaker at Y112.15 per dollar.

Derek Halpenney, European head of global markets research at MUFG, says:

The shifting global central bank monetary policy landscape continues to be an important driver of FX moves as we slowly enter the quiet summer trading period that often can see out-sized market moves.

A look at a year-to-date G10 FX performance table is interesting in showing that the top two best performing currencies are currencies still running a negative yield monetary policy – the euro and the Swedish krona. It underlines the forward-looking nature of recent FX performance as investors look to the end of negative rates in Europe.

Emerging market currencies are also coming off Tuesday’s rally. Russia’s rouble is 0.2 per cent softer at Rbs59.265 per dollar. South Africa’s rand is 0.3 per cent weaker R12.933 per dollar.

European stock indices are higher, with room to rally after a strong lead-in from Asia picked up the mood from a lacklustre session on Tuesday.

London’s FTSE 100 is up 0.2 per cent, with the Xetra Dax 30 in Frankfurt 0.3 per cent stronger. The region-wide Euro Stoxx 600 is up 0.5 per cent.

Financial stocks are in demand, with the Euro Stoxx 600 banking index up 0.3 per cent, as investors look past losses for banks in the US after news there of a 40 per cent dive in quarterly trading revenues.

Australia’s S&P/ASX 200 was up 0.8 per cent, with banks rallying after details of new capital requirements were less onerous than expected.

In Hong Kong the Hang Seng index is up 0.5 per cent, heading for an eighth consecutive day of gains.

China’s Shanghai Composite was 0.9 per cent higher while the Shenzhen Composite was up 1 per cent.

Japan’s Topix is up 0.1 per cent, with consumer staples stocks rallying.

Brent crude, the international oil benchmark, is 0.5 per cent lower at $48.60 a barrel after settling 0.8 per cent higher in the previous session amid talk that Saudi Arabia would cut exports. West Texas Intermediate, the US benchmark, is down 0.5 per cent at $46.16 a barrel.

Gold is off 0.2 per cent at $1,240, but holding around two-week highs.

Looking ahead to the ECB and BOJ policy calls, Nandini Ramakrishnan, Global Market Strategist, J.P. Morgan Asset Management, says:

The Bank of Japan is still pulling out all the stops to try to raise inflation. For now, despite very low unemployment and improved confidence, inflation remains well below their 2% target, suggesting that they need to continue to do what they can to push growth and inflation upward. . It is therefore no surprise that market pricing suggests we will not see an end to the negative rate policy until at least 2020. For Thursday’s meeting, we do not expect any monetary policy change.

The ECB is now in the spotlight after Mario Draghi indicated that maintaining current levels of QE would now be considered too accommodative given the strength of Eurozone data. While we do not expect a change to interest rates in the euro area announced really until after the monthly purchase amount is reduced to zero, we may start getting hints from Draghi about the time line of these changes in the coming meetings. It is more likely timing will be at a later meeting this year.