Dollar drops against yen, investors trim June rate hike expectations

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[June 01, 2016]  By Anirban Nag

LONDON (Reuters) - The dollar fell against the yen on Wednesday, pulling away from a one-month peak set at the start of the week, after soft U.S. data prompted investors to reconsider hopes about whether the Federal Reserve will raise interest rates in June or not.

Data released on Tuesday showed U.S. consumer confidence dipped while a survey on business activity in U.S. Midwest also underwhelmed. That did not bode well for the Institute of Supply Management's manufacturing survey due later in the day, with traders saying that a weak reading could see chances of a June rate hike recede further.

According to CME Group FedWatch program, investors are pricing only a 22.5 percent probability of a rate move in June, down from around 32 percent factored in earlier in the week. Subdued risk sentiment and worries about whether Britain will vote to stay in the European Union or not later this month also buoyed the safe-haven yen. [GBP/]

The dollar fell 1.1 percent to 109.45 yen <JPY=>, weakening from Monday's peak of 111.455 yen, which had been the greenback's strongest level since late April.

The yen's rise came on a day when Japanese Prime Minister Shinzo Abe announced a delay to a scheduled sales tax hike and flagged risks to global growth.

"There is some position adjustment taking place with the delay in the sales tax hike almost priced in by investors," said Yujiro Goto, currency strategist at Nomura. "Also for the dollar, the soft data is weighing and if the ISM manufacturing survey is below expectations, then we could see it having a negative impact on dollar/yen."

Against a basket of six major currencies, the dollar fell 0.2 percent to 95.70, pulling away from a two-month high of 95.968 set on Monday.

The euro was 0.3 percent higher against the dollar, but nearly 1 percent lower against the yen at 122.135 yen.

"A delay of the tax hike was expected to see the yen weaker on the argument that fiscal irresponsibility should weaken the currency," said John Hardy, chief currency strategist at Saxo Bank.

"But that was not the case as the overwhelming fear driving the yen back stronger is perhaps that the Bank of Japan is firing blanks with its current policy tools and the yen will only go higher if global risk appetite weakens."

Meanwhile, the Australian dollar pushed higher after the country's first-quarter growth exceeded market forecasts and prompted investors to scale back expectations for the Reserve Bank of Australia to lower rates soon.

The Aussie dollar rose to $0.7300, pulling away from a 2-1/2 month low of $0.7145 set last week. The currency last traded at $0.7255, up 0.3 percent.

(Additional reporting by Masayuki Kitano; editing by Richard Balmforth)

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