Fed's Williams pushes dollar down to one-month low vs. yen

[August 16, 2016]  By Patrick Graham

LONDON (Reuters) - The dollar fell across the board on Tuesday, falling a full yen to a one-month low against the Japanese currency and down against the commodity-linked currencies most associated with growth and greater risk-taking by investors worldwide.

The greenback has been under pressure for the past week as the perceived chances of a rise in U.S. interest rates this year took a knock from several batches of data and the tone of some Federal Reserve policymakers.

The trigger for its weakness overnight was a paper from San Francisco Fed President John Williams arguing that central banks might have to raise inflation targets, focus more on growth and back much looser fiscal policy in future.

To market ears, that all added up to a strong argument for keeping the Fed's rates unchanged for the foreseeable future and the dollar fell 1 percent against yen and around half a percent against the euro as Asian and European markets came back online.

"The Williams paper yesterday was pretty dovish, so people are selling dollars. Dollar yields are lower pretty much across the curve since the release," said Citi strategist Josh O'Byrne.

Speculation of further aggressive monetary easing by Tokyo that would weaken the yen was quelled by last month's Bank of Japan meeting, and speculation on the chances of the government launching direct intervention in the FX market has also eased.

"There is this feeling that Japan may not have that much left up their sleeve and the Fed does seem to be backing off," said O'Byrne.

"The Japanese have been surprisingly quiet and people in general are talking about (intervention) a lot less. Verbal intervention really stepped up when we were seeing fast moves in the yen, and this has been more of a grind, so it's harder for them to argue that there have been disruptive markets."

The dollar traded as low as 100.15 yen, its lowest since the aftermath of Britain's vote in June to leave the European Union. It weakened to a 7-week low of $1.1258 per euro <EUR=>, and by 0.5 and 0.7 percent respectively against the Australian <AUD=> and New Zealand dollars.

Euro, Hong Kong dollar, U.S. dollar, Japanese yen, British pound and Chinese 100-yuan banknotes are seen in a picture illustration shot January 21, 2016. REUTERS/Jason Lee

Against a basket of six major currencies, it lost 0.6 percent to 95.051

"The dollar is being weighed on by the limited appetite for Fed trades, and this strength in emerging markets and the commodities currencies," said Stephen Gallo, a strategist with Canada's BMO in London.

The markets will look to U.S. data later in the day including consumer prices, housing starts and industrial output for another chance to gauge the health of the economy.

The dollar will probably fall further against the yen over the next few months, with the yen supported by factors such as Japan's rising current account surplus, said Heng Koon How, senior FX investment strategist for Credit Suisse.

"Key risk to our view for more yen strength is of course more aggressive easing by the Bank of Japan when they next meet," said Heng, who expects the dollar to be trading at 96 yen three months from now.

"But so far this year, they have disappointed and failed to turn around sentiment," he added.

(Additional reporting by Shinichi Saoshiro in Tokyo and Masayuki Kitano in Singapore; Editing by Kevin Liffey)

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