The dollar dipped on Monday as the currency took a breather after scaling a 2-1/2-month high versus a basket of peers, although an improvement in risk appetite after China’s monetary easing limited the losses.
Stock markets gained worldwide after China on Friday cut rates for the fifth time this year, just a day after the European Central Bank signalled that it was ready to increase the scale of its stimulus measures.
The benchmark 10-year U.S. Treasury note yield rose nearly 6 basis points on Friday to a 2-week high as equity markets rallied and reduced demand for safe havens, providing broad support for the dollar.
The dollar index slipped 0.2 percent to 96.953 after hitting 97.201 on Friday, its highest since Aug. 12.
The greenback was down 0.2 percent at 121.16 yen after brushing a 2-month peak of 121.60 yen. The euro crawled up 0.2 percent to $1.1035 after falling to $1.0989 , its lowest since Aug. 11.
“Globally, the focus right now is on central banks and monetary policy as a whole. Dollar/yen for example was driven higher by a general improvement in risk appetite, not on hopes of easing by the Bank of Japan alone,” said Shinichiro Kadota, chief Japan FX strategist at Barclays in Tokyo.
China’s easing late on Friday was the latest reminder of the monetary policy divergence taking place between the Federal Reserve and other central banks.
“The price action underscores that the divergence theme that is central to our bullish U.S. dollar scenario is not only driven by the timing of the Fed’s lift-off but by what other central banks are doing and going to do,” wrote Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
“The divergence has not peaked. Nor will it peak for at least the next year.”
The U.S. Federal Reserve makes a policy decision on Wednesday. While the Fed is widely expected to refrain from raising interest rates this time, the easing stance taken by its counterparts have kept the divergence theme alive.
Elsewhere, the Reserve Bank of New Zealand meets on Thursday and the BOJ on Friday.
The New Zealand dollar gained 0.3 percent to $0.6773 , shored up by speculation that the RBNZ will pause cutting rates on Thursday and save its options should the global economy slow further. The RBNZ has cut rates three times this year.
The BOJ is also gathering attention as a run of downbeat Japanese indicators has fanned expectations of further monetary easing.
The Australian dollar was subdued after a drop in crude oil prices weighed on commodity currencies. The Aussie nudged up 0.2 percent to $0.7245 after dipping to $0.7206 earlier.