Central bank messages calm market nerves, boost dollar

[January 22, 2016]  By Patrick Graham

LONDON (Reuters) - The dollar firmed against a basket of currencies on Friday, as rising expectations of monetary easing by central banks in Europe and Japan hit the yen and euro while prompting a strong recovery in global oil and stock markets.

Oil-driven currencies such as the Norwegian crown and Canadian dollar gained around 1 percent while sterling -- down 10 percent in the past month -- bounced 1.3 percent against the euro and 0.7 percent against the dollar.

Those moves paled in comparison with a 5-7 percent rise in oil and a 3 percent jump for European stocks, but they were the first respite this week for a number of currencies most closely correlated with global appetite for risk.

"There's some relief in all these moves, but the action on FX this week has been much more limited than on some of the other markets -- people naturally have just not been so interested," said the head of FX trading with one London brokerage, asking not to be named.

The dollar index , which tracks the greenback against a basket of six major rivals, rose about 0.3 percent to 99.356.

The dollar also rose back above 118.00 yen to a one-week high <JPY=>, a reflection of official comments on the yen and expectations the Bank of Japan might decide to pump more money into the economy next week.

After European Central Bank chief Mario Draghi said it would need to review policy in March -- read as a promise of more easing -- sources familiar with the BoJ's thinking said the market turmoil could lead it to consider more asset purchases.

"Government thinking around a potential BoJ move seems to be shifting in light of the declining Nikkei," said Josh O'Byrne, a strategist at Citi in London, saying that was driving traders to close out bets on further yen strengthening against the dollar.

He put a 30-40 percent chance on the BoJ moving next week.
 

Both the euro and yen have benefited from their status as funding currencies in the global interest rate carry trade.

When sentiment is strong, investors borrow in the yen and euro to put money into higher-yielding currencies. But when markets are concerned about the global outlook that trade tends to reverse, pushing money back into both.

That the euro remains as strong as it is reflects some of the doubts over the dollar's ability to rally further -- or of the U.S. Federal Reserve to raise rates -- that have only grown with a sometimes dizzying sell-off in stock markets this week.

The euro was down half a percent at $1.0818 <EUR=EBS>, still well above a two-week low of $1.0776 touched in the wake of Draghi's comments on Thursday.

"The recovery in risk is also clearly benefiting the dollar against the other majors," said a fund manager with one Swiss-based investment house. "But it was really noticeable yesterday how the euro held up after the initial fall on Draghi. Risk-wise, its still all on a knife edge."

(Editing by Catherine Evans)

[© 2016 Thomson Reuters. All rights reserved.]

Copyright 2016 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.