By Rae Wee
SINGAPORE (Reuters) – The euro firmed a touch on Thursday ahead of a policy decision from the European Central Bank (ECB) where traders consider a rate cut all but certain, while the dollar eased on renewed bets of a U.S. Federal Reserve easing cycle expected this year.
The Canadian dollar edged slightly higher, trimming some losses from the previous session, after the Bank of Canada became the first G7 country to cut its key policy interest rate as widely expected. It was last at C$1.3687 per dollar.
The euro gained 0.07% to $1.0876, as traders looked ahead to the ECB meeting later in the global day for guidance on the bank’s rate outlook.
While policymakers have telegraphed an intention to lower borrowing costs this month, they have remained reticent on how soon subsequent cuts could come.
“The Governing Council’s rationale will likely be driven by a stronger-than-expected recovery in (business) activity and increased confidence that inflation will return to the targeted level,” said market strategist Henk Potts at Barclays Private Bank.
“Beyond the June meeting, we forecast that we could see quarter-point cuts in September and December.”
In the broader market, the U.S. dollar was on the back foot, weighed in part by easing labour market conditions in the United States which added to the case for Fed rate cuts this year.
Markets have priced in nearly 50 basis points of Fed rate cuts this year, with the first expected to come in September.
Data on Wednesday showed the U.S. services sector switched back into growth mode in May after a short-lived contraction the month before, though details of the survey pointed to employment remaining in contraction territory.
“While new orders suggest continued demand, the selected industry comments and continued employment contraction reveal a touch of caution among service-providers,” said economists at Wells Fargo.
Against the U.S. dollar, the kiwi touched a three-month top of $0.6201, while sterling rose 0.09% to $1.2800 and the Aussie edged 0.25% higher to $0.6664.
The dollar index eased 0.14% to 104.10.
YEN RISES
The yen nursed some of its losses from the previous session and rose 0.4% to 155.50 per dollar.
The Japanese currency had a brief rally earlier in the week following turbulence in emerging markets owing to political worries, which sent investors unwinding positions in yen-funded carry trades.
In a carry trade, an investor borrows in a currency of a country with low interest rates and invests the proceeds in a higher-yielding currency.
A strong election victory for Mexico’s ruling party sparked concern about disputed constitutional reform, resulting in a squeeze on long peso/short yen positions, which has been a favourite among carry trades.
The peso was last little changed against the yen, following a 2.6% gain in the previous session. It had fallen roughly 6% against the Japanese currency at the start of the week, in the wake of Mexico’s election results.
Adding to yen gains were expectations of the Bank of Japan (BOJ) scaling back its massive bond purchases as early as this month, as it works to normalise monetary policy.
The BOJ will hold its two-day monetary policy meeting next week.
“A greater influence was headlines that the BOJ might look to cut back on bond purchases in the June BOJ meeting,” said Chris Weston, head of research at Pepperstone.
BOJ Governor Kazuo Ueda kept a near-term tapering of the bank’s huge bond buying on the table as he said this week the BOJ’s basic stance is to allow market forces to set long-term interest rates.
“This was almost a momentum play from the Japanese central bank – that is, add in JPY positive news flow when funding currencies – JPY and CHF – were already being covered and bought back, and the result was the JPY rally gaining additional legs,” said Weston.
(Reporting by Rae Wee; Editing by Christopher Cushing)
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