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 The greenback has bounced back over 2 percent since lows hit on
Friday in the wake of the Fed's decision not to raise rates
immediately and its paring back of U.S. growth forecasts. Though
some now do not expect a rate hike until early next year, about half
are betting on a rise in October or December.
In stark contrast, expectations are growing that the European
Central Bank and Bank of Japan could expand their already expansive
stimulus programs, which is putting pressure on the euro and yen,
while boosting the greenback further.
The single currency dropped 0.3 percent on Tuesday to $1.1159, its
weakest since Sept. 9, as euro zone bond yields also fell. But the
dollar was down 0.6 percent against the safe-haven yen at 119.85 yen
as shares slid.
"The main focus is equities, and FX is responding to that, so the
yen is bid, which is partly a reflection of lower risk appetite,"
said Citi currency strategist Josh O'Byrne.
"The euro is down – I would say most of all that’s a reflection of a
rally in fixed income...which suggests the market sees this
volatility in financial markets and stocks as increasing the
potential for ECB easing."
Against a basket of six major currencies, the dollar rose 0.1
percent to 96.088, its strongest level since Sept. 10.
"As long as the markets continue to calm down, particularly emerging
markets, there is definitely a reason to trade the dollar slightly
higher, but not too much," said Commerzbank FX strategist Esther
Reichelt in Frankfurt.
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"Too much dollar strength could worsen the inflation outlook and
could lead to the Fed not hiking."
Atlanta Fed President Dennis Lockhart on Monday said last week's
decision to leave rates unchanged was largely a "risk management"
exercise to be sure recent market volatility would not become a drag
on the U.S. economy. He said he still expects the Fed to hike rates
later this year.
Investors are now waiting to hear from Fed Chair Janet Yellen
herself, who is due to speak on Thursday.
Japanese markets remained shut for a public holiday and will also be
closed on Wednesday. Trade will resume on Thursday.
(Additional reporting by Masayuki Kitano in Singapore and Ian Chua
in Sydney; Editing by Mark Heinrich)
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