FOREX-Aussie dips after RBA; yen pressured by rising U.S. yields

BY Reuters | TREASURY | 07/05/22 01:30 AM EDT

By Kevin Buckland

TOKYO, July 5 (Reuters) - Australia's dollar erased early gains on Tuesday after the country's Reserve Bank delivered an as-expected half-point rate hike but not the hawkish forward guidance that some had hoped for.

The yen slid back toward a 24-year low to the greenback on a rise in U.S. Treasury yields, while the euro edged higher, adding some distance from five-year lows.

The Aussie ticked 0.09% lower to $0.6820, after trading as high as $0.6895 earlier in the day.

Both traders and analysts had predicted a second straight 50 basis-point hike on Tuesday. Governor Philip Lowe had said ahead of the meeting that the choice would be between a quarter- and half-point increase, although the U.S. Federal Reserve's 75 basis-point increase last month had fuelled speculation the RBA might need to be more aggressive.

"We got a small wobble in the Aussie as the statement appears to confirm that if the RBA board did debate an option other than the 50 basis points we got, it was the 25 basis points that Governor Lowe flagged a couple of weeks ago, and not 75 basis points," said Westpac strategist Sean Callow.

"No last minute FOMC-style swing to more aggressive tightening."

Meanwhile, the U.S. dollar was up 0.4% at 136.23 yen , gaining support from a strong rebound in the 10-year Treasury yield, which jumped as high as 2.9780% in Tokyo on Tuesday from the lowest since May at 2.7910% on Friday.

There was no trading in Treasuries on Monday, with U.S. markets closed for the Fourth of July holiday, which also lightened volumes in currency markets.

The dollar index - which measures the buck against six major peers - was about flat at 105.15 after finishing Monday largely unchanged.

On Friday, it rose as high as 105.64, threatening the two-decade peak of 105.79 reached in mid-June.

The euro, which is the most heavily weighted in the index, rose 0.15% to $1.0436 after ending Monday about flat. Over the past two months, it has been bumping against a floor around $1.035, levels not seen since the beginning of 2017.

The euro got support overnight from a rise in regional yields after Bundesbank chief Joachim Nagel said the very accommodative stance of the European Central Bank (ECB) would swiftly be abandoned and a restrictive policy stance might be needed to achieve the inflation target.

The ECB is gearing up to raise interest rates for the first time in a decade later this month.

The policy outlook may not sustain the euro longer term though, National Australia Bank markets economist Tapas Strickland wrote in a note to clients.

"Europe remains stuck in the middle between the Russia-Ukraine crisis and a weakening global economy," he said.

"Given Europe's dire predicament, it is hard to see an enduring euro rally, which may keep USD strength going for longer."

(Reporting by Kevin Buckland; Editing by Bradley Perrett and Sonali Desai)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

fir_news_article