By Kevin Buckland and Stefano Ribaudo
(Reuters) – The dollar was slightly lower against a basket of currencies on Monday while falling sharply against the yen as investors focused on U.S. President Joe Biden’s decision to end his re-election campaign and the next moves from the Federal Reserve and the Bank of Japan.
The Japanese currency could be at a turning point after falling since the start of 2024 as the Federal Reserve moves closer to cutting interest rates and the Bank of Japan is widely expected to tighten monetary policy soon, analysts said.
The Federal Reserve’s Open Market Committee is scheduled to meet on July 30, one day before the Bank of Japan’s meeting.
Financial markets are fully pricing in a 25 basis point rate cut by the Federal Reserve by September.
“The yen has become more volatile ahead of the latest policy meetings by the Fed and the Bank of Japan,” said Lee Hardman, senior currency strategist at Mitsubishi UFJ, noting that the Japanese currency had been supported by “more convincing evidence of slowing inflation in the US.”
“Former President (Donald) Trump expressed his concern about the high level of the US dollar against the yen,” he added.
The US dollar fell 0.6% against the Japanese currency to 156.58.
The US dollar, which measures the value of the greenback against a basket of foreign currencies, fell 0.1% to 104.30.
Biden announced his withdrawal from the race on Sunday, endorsing Vice President Kamala Harris to replace him as the Democratic nominee in November’s election. Harris quickly received support from many within the party, but several prominent names, including former House Speaker Nancy Pelosi, have remained silent.
Former President Trump, the Republican nominee, is a front-runner in betting markets after Biden’s disastrous debate performance last month and questions about his age and health.
Commonwealth Bank of Australia strategist Joseph Capurso warned that it was too early to read too much into the dollar’s reaction.
“The bottom line is what the polls are showing this week,” Capurso said, explaining that a lower chance of a Trump victory would weaken the dollar, and vice versa.
“Harris may be a stronger candidate, but is that enough to change voters’ minds?”
UniCredit (BIT:) notes that the odds associated with different outcomes in the US election have not changed much since Joe Biden’s announcement.
The euro rose 0.05% to $1.088.
Analysts noted that the European Central Bank did not provide any coordinated support at last week’s policy meeting on pricing in a September rate cut, which remains a strong fundamental case.
The dollar rose 0.1% to 7.2943 yuan in offshore trade after the People’s Bank of China unexpectedly cut its seven-day reverse repurchase rate to 1.7% from 1.8%, saying the move would improve open market operations and support the real economy. It was followed minutes later by surprise cuts to key one-year and five-year lending rates.
The Australian dollar fell 0.25 percent to $0.6651, giving up earlier gains by roughly the same margin following news of Biden’s withdrawal.
The New Zealand dollar fell 0.22% to $0.5996.
“Sentiment is fragile and I have clearly noticed that… with interest rate cuts in China adding fuel to the bearish fire,” said Matt Simpson, market analyst at City Index.
“Fed policy and yield spreads are no longer the only game in town, and we are just getting ready for the US election.”