By Tom Westbrook
SINGAPORE (Reuters) – The euro clung to its sharpest rise in four months on Thursday following hawkish remarks from a central bank policymaker, while the yen powered toward its strongest week in three months on growing bets Japan could hike interest rates in December.
The moves stalled the dollar’s resurgence ahead of what is likely to be thin trade through the rest of the week due to the U.S. Thanksgiving holiday.
European Central Bank board member Isabel Schnabel told Bloomberg overnight that rate cuts should be gradual and move to neutral, not accommodative, territory, and investors pulled back on rate cut bets, sending the euro up 0.7% to $1.0560.
It faces resistance around $1.06, which may be put to the test if inflation readings in Germany, due later in the session, turn in stronger than expected.
The yen, meanwhile, has rallied sharply for two days, rising through its 200-day moving average to 151.50 per dollar. It was slightly weaker in morning trade in Asia, and hovered around 160 per euro.
Rates pricing implies about a 60% chance of a 25-basis point rate hike in Japan next month, up from around 50% a week ago, and a majority of analysts polled by Reuters expect a hike.
“Stronger than expected Japanese inflation readings and the risk that the Fed may cut rates again in December have added to the downside pressure on dollar/yen,” said Rabobank senior currency strategist Jane Foley in a note to clients.
The moves, combined with what traders said was an ebbing in corporate dollar buying once they had satisfied month-end needs, sent the dollar broadly lower and the U.S. dollar index dropped by nearly 0.8% overnight to sit at 106.13.
Overnight U.S. yields fell, adding to downward pressure on the dollar, after data showed U.S. personal consumption expenditure in line with expectations with a 0.2% monthly increase.
Sterling climbed on the weaker greenback to $1.2675 and the New Zealand dollar logged a gain of more than 1% on Wednesday after a 50-basis point rate cut in Wellington was shallower than some market expectations for 75 basis points.
The kiwi last sat at $0.5892, while the Aussie/kiwi cross fell 0.7% overnight to A$1.1020. The move, as well as softer-than-expected inflation, muted gains for the Australian dollar which rose only 0.4% overnight.
An 0855 GMT speech from Reserve Bank of Australia governor Michele Bullock is expected to offer some guidance around the central bank’s sensitivity to inflation data.
“We think that if policy is discussed, a similar ‘cautious’ message is likely to be repeated with the RBA on a different path to many of its counterparts,” said Corpay strategist Peter Dragicevich.
In emerging markets, Brazil’s real collapsed to a record low and ten-year yields spiked 38.5 basis points on concern at the impact of tax cuts on a stretched budget.