Consolidation Gives Dollar Heavier Tone

The US dollar is trading with a heavier bias today as its recent run is consolidated. The euro is trying to snap the eight-day slide that brought it to nearly $1.0665 yesterday, the lows for the year. It is almost as if participant saw the proximity of last year’s lows ($1.0460-$1.0525) and decided to pause, perhaps to wait for additional developments, such a Fed Chief’s Yellen’s testimony before the Joint Economic Committee of Congress. 

The dollar rose to about JPY109.75 yesterday. Recall that it had slumped to JPY101.20 in the first reaction to the US election news a week ago. The market appears to be pausing ahead of the psychologically important JPY110 level.  The 50% retracement of this year’s dollar decline is seen near JPY110.35.  The 38.2% retracement of the dollar’s retreat from the multi-year high set in the middle of 2015 was JPY109.30.  The 50% is found near JPY112.45.

The dollar was pulling back in the Tokyo session when the BOJ stepped in and surprised market participants.  It did not intervene in the foreign exchange market, but under the new monetary policy framework are facilitating a steeper yield curve, it offered to buy unlimited amounts of one-to-five year JGBs at fixed rates.  This helped stabilize the JGB market, which was being dragged into the rising yields that had swept the global markets, emanating from the US.  The debt purchases also appeared to help put a floor under the dollar near JPY108.50.  

That the BOJ focused on the short-end of the coupon curve suggests that it was not particular concerned about the rise in the 10-year yield, which is an aid to keep around zero.  The yield on the 10-year bond rose five consecutive sessions coming into today, reaching a high yield of 5 bp.  It closed just above one basis point today.  

The UK reported an over-the-top jump in retail sales, but the foreign exchange market was non-plus. Sterling is slightly firmer against the dollar, but like yesterday has spent today within the range seen on Tuesday (~$1.2380-$1.2530). Sterling is flat against the euro.