Dollar lifts off two-month low in Europe

The dollar stuck near a two-month low on Tuesday as markets awaited the confirmation hearing of new Federal Reserve chair Jerome Powell, though prepared remarks indicated US interest rates would rise very gradually under his watch. With the greenback hemmed into tight trading ranges against its major rivals, market attention was also drawn to the US tax bill that may be formally voted through by a US finance committee later this week.
"With Powell we expect more of the same as Yellen and we don't expect any major change in policy direction," said Elsa Lignos, global head of FX strategy at RBC Capital Markets in London, referring to the outtgoing Fed chair Janet Yellen The dollar traded 0.2 percent higher at 93.03 against a broad trade-weighted basket of its rivals, not far from a two-month low of 92.50 it hit on Monday.
The Japanese yen has been a particular outperformer against the dollar in recent days, strengthening more than 3 percent so far this month and hitting a 2-1/2 month low of 109.55 on Monday. With latest positioning data showing yen short positions at their biggest since mid January 2014, some investment banks are calling for a tactical trade in buying the Japanese currency.
Combined with recent strong economic data and early signs of a tilt away from its multi-year accommodative stance, some large investors such as Investec Asset Management are turning bullish. "Moreover, at times of market stress, the yen tends to appreciate and overall positioning has become a bit stretched," said John Stopford, head of multi-asset income at the firm.
RBC's Lignos has a tactical long bet on the Japanese yen. In prepared remarks for his Senate confirmation hearing released by the Fed on Monday, Powell, who is already a policymaker, defended the US central bank's use of broad crisis-fighting powers. He will take questions during the hearing which is due to start later on Tuesday. The brief statement also signalled a willingness to move aggressively against any downturn, and an insistence on flexibility and independence from political influence in setting policy.
"The market sees Powell as 'Mr Continuity', so nothing is expected, but I think there is some risk around the event," said Saxo Bank's chief FX strategist John Hardy. "There are lots of hypothetical questions they could ask him ... and if he appears on the hawkish side there could be some volatility."
In Europe, Britain's pound dipped to $1.3310 as traders shrugged off the results of a Bank of England stress test which suggested that UK banks could cope with a disorderly Brexit. The euro barely moved at $1.1903 after scaling a two-month peak of $1.1961 on Monday.