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Dollar recoups losses after worst week in three months

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The dollar rebounded on Monday after its poorest weekly performance in three months the previous week, helped by gains against the yen, which pulled back from Friday's three-week highs after the Bank of Japan eased policy less aggressively than expected.

The dollar shed 2 percent last week against a basket of currencies after the Federal Reserve gave no hint it would raise interest rates soon, and on disappointing U.S. growth data at the end of the week.

"The (GDP) data dented the dollar's previously positive tone, which was the result of an otherwise positive run of economic reports over recent weeks," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

He added that the dollar's decline on Friday followed five straight weeks of gains, "which arguably made it somewhat ripe for a pullback."

The dollar, however, did pare Monday's gains after data showed that the U.S. economy's manufacturing sector in July expanded at a slower pace than in the previous month.

In late morning trading, the dollar index rose 0.22 percent to 95.75.

New York Fed President William Dudley said at a central bankers' conference in Bali on Monday that the Fed might raise rates before the November U.S. election if the economy and labor market improve quickly, although he added that the Fed should be cautious .

Fed funds futures rates on Monday suggested a 37 percent probability that the U.S. central bank will hike rates at its December meeting, down from about 48 percent two weeks previously, according to CME Group's FedWatch.

Against the yen, the dollar rose 0.30 percent to 102.39, recovering from a three-week low. Some analysts think the yen's decline was temporary.

Luzdary Hammad, research analyst at FXTM in Nicosia, Cyprus said the BoJ's under-delivery of stimulus measures came amid overall central bank caution, which consequently spurred a wave of risk aversion.

"This combination of risk aversion and central bank inaction could strengthen the yen further, consequently punishing the already fragile Japanese economy," Hammad added.

Investors will focus this week on a heavy economic calendar, with central bank meetings in Australia and the U.K. and culminating in Friday's U.S. non-farm payrolls report.