The dollar steadied against the euro and yen on Friday, though lower US yields capped its rebound after the Federal Reserve's dovish undertones sapped the greenback's recent strength. The euro was flat at $1.2695, but still within reach of a low of $1.2664 struck overnight after a plunge in German exports raised fears of a recession in Europe's largest economy and reinforced a case for more action by the European Central Bank.
The dollar was little changed at 107.88 yen after touching a three-week low of 107.53 overnight. It was on track to lose about 1.8 percent on the week, which would be its largest weekly loss since March. On October 1, the dollar surged to a six-year high of 110.09 yen on factors including expectations for an early rate hike by the Fed. However, a recent decline in US Treasury yields have helped undermine its strength.
"The Fed mentioned the strong dollar after Japanese authorities had already expressed their concerns towards a weak yen. This puts the two countries in step and has tempered the bullish dollar/yen scenario," said Koji Fukaya, president at FPG Securities in Tokyo. "While the rates markets were less sanguine about prospects of an earlier Fed rate hike, the currency market looks to have gone a little too far," he said. "The stall in the (dollar) rally is likely to prompt speculators to unload their dollar positions."
The Fed's September meeting minutes, released on Wednesday, suggested the US central bank was in no hurry to hike rates, with a surprise mention of the greenback's strength further sobering dollar bulls. Debt markets have recently been pushing out the timing of a likely Fed rate increase further into 2015 amid worries about slowing global growth and a general lack of inflationary pressure in the major economies.
All of that has made markets much more jittery, as seen in a jump in the CBOE volatility index, a measure of investor anxiety, to highs not seen since early February. Analysts said the pick-up in volatility means the dollar's road higher is likely to get bumpier. Societe Generale strategist Kit Juckes said the dollar has rallied too far, too fast since July, on the back of good data and a small change in the FOMC language.
In a note published Thursday and titled "Don't buy the dollar, just sell the euro," Juckes said the European outlook has taken a turn for the worse, with recent data confirming that the Ukraine crisis and sanctions on Russia are hurting growth in Germany. "Maybe it's time for the FX market to stop looking for a stronger dollar and focus on the risk of further euro weakness instead," he said.
Wednesday's grim German data reinforced expectations that the ECB will eventually have to inject more stimulus, an option the bank reiterated in its monthly bulletin. Commodity currencies sagged as a global slide in equities sapped risk appetite. The Australian dollar was down 0.2 percent at $0.8766. Its New Zealand peer fell back to $0.7848 from a two-week high of $0.7975.
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