By Rae Wee
SINGAPORE, May 5 (Reuters) – The yen expected its first weekly gain in almost a month on Friday, buoyed by safe-haven demand as banking sector turmoil unfolds in the United States, while the dollar fell as traders became more aggressive Rate cuts priced in by the Federal Reserve.
The euro retreated slightly from a recent one-year high to last at $1.1034 after the European Central Bank (ECB) slowed the pace of interest rate hikes with a 25 basis point hike on Thursday.
While ECB President Christine Lagarde signaled further tightening, markets reduced their expectations of how much interest rates would rise further.
“Lagarde was hawkish in her press conference, but I think financial markets haven’t really bought their stance on further rate hikes in the coming months,” said Carol Kong, currency strategist at the Commonwealth Bank of Australia.
In the broader FX market, the yen was last seen 0.2% higher at 134.02 per dollar and is heading for a weekly gain of over 1.5% after posting three straight weeks of losses.
“The Japanese yen has slowly regained its safe haven appeal and has definitely been supported by concerns about US regional banks and associated safe haven demand,” Kong said.
A deepening crisis at US regional banks has investors on edge, and pressure is mounting on US regulators to take further steps to support the sector.
Shares in PacWest Bancorp tumbled Thursday, dragging other regional lenders lower after the Los Angeles-based bank’s plan to explore strategic options fueled investor fears.
Canada’s Toronto-Dominion Bank Group also called off its $13.4 billion acquisition of First Horizon Corp on Thursday, in another sign of stress within the sector.
Traders have since priced in more aggressive Fed rate cuts, with fed funds futures implying a slim chance rate cuts could come as early as June and into the end of the year.
The story goes on
As a result, the greenback fell largely on Friday, with the dollar index down 0.11% to 101.23.
Sterling rose 0.16% to $1.2595.
“Inflation data and employment indicators…along with bank lending standards will be key to the Fed’s June decision. Debt ceiling negotiations are another key risk,” said Sonia Meskin, head of US macros at BNY Mellon .
“We think the Fed is unlikely to consider rate cuts before 2024.”
The April nonfarm payrolls report is due later Friday, the next key data point that will provide further clues as to the Fed’s fight against inflation.
Data released earlier this week showed that the US services sector maintained a steady pace of growth in April, suggesting inflation remains stubborn while US private employers boosted hiring over the last month.
Elsewhere, the Australian dollar was up 0.26% to $0.6711, while the kiwi hit a three-week high of $0.6311.
The Reserve Bank of Australia warned in a quarterly monetary policy statement on Friday that inflation risks are on the upside amid slow productivity growth, rising energy prices and rising rents as population growth beats all expectations.
(Reporting by Rae Wee; Editing by Jacqueline Wong)
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