© Reuters. FILE PHOTO: Banknotes of the Japanese yen and the US dollar are shown in this illustration taken on March 10, 2023. REUTERS/Dado Ruvik/Illustration
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Written by Kevin Buckland and Elon John
TOKYO/LONDON (Reuters) – The euro fell after several data points confirmed market expectations of a 25 basis point European Central Bank hike this week, while the dollar jumped more than 1% against the dollar on Tuesday after a surprise rate hike by the central bank.
The week is also significant in the US as many data will be released, including job opening numbers later in the day, payroll numbers on Friday as well as the Federal Reserve meeting that concludes on Wednesday.
The euro was last at $1.0973, flat on the day, back below the symbolic $1.10 level after data on Tuesday showed that eurozone banks are turning off credit taps and a key inflation measure is finally falling.
Both reinforce the argument for a smaller rate hike by the European Central Bank later this week.
The British pound fell 0.1% to $1.2482.
But investors’ eyes were already heading across the Atlantic with the Job Opportunities and Labor Market Survey (JOLTS) data due at 15.00 GMT.
“We know the federal peak policy is looming, they’re going to raise 25 basis points (this week), they might keep it optional for June, and then it’s all about whether they’re in a position to cut, and we’ll learn more about that controversy where Come the Jolts meeting, the Fed meeting and the payrolls,” said Samy Chaar, chief economist at Lombard Odier.
“When you think about the news flow it will outpace European inflation and the Reserve Bank of Australia.”
Expectations of a US rate cut later this year, when the European Central Bank was still raising interest rates, reinforced the basis for the gains that European currencies, especially the euro, have made in recent months.
interest rate
Earlier today, the Australian dollar jumped as much as 1.2% after the Reserve Bank of Australia (RBA) raised interest rates to 3.85% and said further tightening may be required to ensure inflation returns to target in a reasonable time frame.
It was last up 0.94% to $0.6693.
“I think the RBA now thinks they need to see a 4 vs. the cash rate before considering that it might be done,” said Ray Attrell, head of foreign exchange strategy at National Australia Bank (OTC:).
“Certainly the data flow since April has been on the strong side,” he added. “It is very likely that another one will come, although whether it will come is soon in June.”
The New Zealand dollar followed in the flow of the Australian dollar, rising 0.55% to $0.6201.
Elsewhere, the yen remained under pressure from the Bank of Japan’s decision last week to keep interest rates very low, and the dollar rose 0.23% to 137.78 yen for the first time since March 8. A move above 137.90 would be the highest. level this year.
The levels of the yen against European currencies were more dramatic. In early trade Thursday, the euro reached 151.42 yen, a new high since September 2008. The pound hit its highest level since early 2016, and the Swiss franc was at its highest against the yen since at least 1982, according to Refinitiv data.
“The indication that the Bank of Japan will not change its negative interest rate policy anytime soon gives a green light to speculators to bring back carry trades into the yen,” said Naka Matsuzawa, chief Japan strategist at Nomura Securities.
In carry trades, investors borrow in low-yielding currencies to invest in higher yields. With Japanese interest rates fixed near zero, the yen has long been an attractive currency for financing such deals.
“The odds of the Fed continuing the process of raising interest rates, rather than lowering them, are now a little higher,” Matsuzawa said.