The dollar held near a 17-month low struck overnight against the yen on Friday as the Federal Reserve’s less hawkish outlook for U.S. interest rates weighed on the U.S. currency.
The dollar has slid sharply since the U.S. central bank lowered its expectations for interest rate increases this year at the midweek Federal Open Market Committee (FOMC) meeting.
Treasury yields have dropped sharply after the policy meeting, fuelling the dollar’s fall to its weakest in five months against a basket of major currencies.
“Short-term speculators are leading the action. They appear to be selling the dollar and Japanese stocks in tandem, trying to probe for a bottom,” said Kaneo Ogino, director at foreign exchange research firm Global-info Co in Tokyo.
“They are testing to see if the trough of the recent 110-115 yen range can hold,” he said
The market’s focus was on how far the yen could rise before it elicited some kind of response from Japanese authorities.
The dollar’s post-FOMC weakness against the yen presents a potential headache for Japan. The country would like to see the yen remain relatively weak to support its exporters, but the market thinks Japan has to tread carefully lest it is accused of engineering competitive devaluations.
“It is easier for speculators to bet on further dollar weakness as the European and Japanese central banks have just concluded their policy meetings, meaning further easing will not take place for a while,” said Masafumi Yamamoto, chief FX strategist at Mizuho Securities in Tokyo.
The ECB eased extensively last week, while the Bank of Japan stood pat at its policy meeting earlier on Tuesday. The BOJ had adopted negative interest rates in January, but the shock move did little to weaken the yen.
“The Japanese authorities have not been clear in their stance towards a strong yen. The market could attempt to test the authorities to see where exactly they stand on the yen,” Yamamoto said.
The dollar index (DXY) fell to a five-month trough of 94.847 and was set to end the week 1.5 percent lower.
Elsewhere, sterling received a further boost against the broadly weaker dollar after the Bank of England on Thursday kept interest rates steady as expected and said rates were more likely to rise than not.
A continuing bounce in crude oil prices boded well for commodity-linked currencies. The Australian dollar rose to an eight-month peak on Friday, while the Canadian dollar advanced to a five-month high versus the dollar overnight.