Dollar inches lower, barely reacts to Trump speech

January 31, 2018

New York (Jan 31)  The dollar inched lower against a basket of major rivals on Wednesday, showing scant reaction to U.S. President Donald Trump's State of the Union address.

Trump called on the U.S. Congress to pass legislation to ensure at least $1.5 trillion in new infrastructure spending.

He also urged lawmakers to work toward bipartisan compromises, but pushed a hard line on immigration. The dollar index, which measures the greenback against a basket of six major currencies, was last down 0.1 percent on the day at 89.062 , staying above a three-year low around 88.43 set last week.

The euro edged up 0.2 percent to $1.2423 .

The yen slipped briefly after the Bank of Japan increased its buying of medium-term Japanese government bonds (JGBs) in a move seen as a warning shot against further rises in bond yields. The dollar reached its intraday high of 109.095 yen shortly after the BOJ announcement. The dollar later pared its gains and was last trading at 108.79 yen , steady on the day.

The BOJ's move came after the 10-year JGB yield had risen to a 6-1/2-month high of 0.095 percent on Tuesday. The central bank's policy guidance is to control the 10-year yield "around zero percent."

BOJ officials have said that any changes to bond-buying operations are fine-tuning and are not meant to telegraph hints on policy.

Still, some market participants probably interpreted the increase in JGB buying as a signal that the central bank will stick with its monetary stimulus, said Teppei Ino, an analyst for Bank of Tokyo-Mitsubishi UFJ in Singapore.

"The 10-year JGB yield had almost touched 0.1 percent yesterday, so there was a focus on how they would try to rein in that move," Ino said.

A reduction in the BOJ's buying of long-dated government bonds earlier this month had sparked speculation that the central bank was moving toward an eventual exit from its large stimulus, giving a lift to the yen.

Speaking in parliament on Wednesday, BOJ Governor Haruhiko Kuroda stressed the need to proceed with strong monetary easing, and added that he doesn't see a problem with financial intermediation now. The focus now shifts to the U.S. Federal Reserve's monetary policy statement due later on Wednesday, and a U.S. jobs report on Friday that will include data on nonfarm payrolls and average hourly earnings.

The Fed is widely expected to keep interest rates unchanged this week, and investors will be looking to its policy statement for fresh hints on the outlook for interest rates this year.

The Fed probably won't make major changes to its assessment of the economic and inflation outlook at this stage, said Roy Teo, investment strategist for LGT Bank in Singapore, adding that any material changes are likely to be "further down the road".

Since market participants already seem to be bracing for the possibility of three U.S. interest rate hikes this year, the chances of the dollar getting a lift from the Fed's forthcoming policy statement appear low, Teo added.


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