Trade optimism pressures yen but caution prevails ahead of Fed, BOJ

By Stanley White

TOKYO (Reuters) – The yen was pinned near a six-week low versus the dollar as signs the United States and China were narrowing their differences over trade ahead of key talks decreased demand for safe haven assets.

The euro held steady versus the dollar in Asia after swinging wildly on Thursday following the European Central Bank’s surprise decision to resume government debt purchases from November to support a flagging economy.

In the very short-term, guarded optimism about a resolution to the U.S.-China trade war should continue to push Treasury yields higher and weigh on safe-haven currencies.

However, this confidence could be short-lived as the U.S. Federal Reserve is widely expected to cut interest rates next week while the ECB’s easing places pressure on the Bank of Japan to follow suit.

“We’ve managed to scale back our pessimism about U.S.-China trade talks, which is a supportive factor for now,” said Takuya Kanda, general manager of research at Gaitame.com Research Institute in Tokyo.

“Once we start to focus on the Fed’s rate cut, perceptions of the market will change. Treasury yields and dollar/yen look to be too high and are likely to start drifting lower.”

The dollar was a tad higher at 108.170 yen , hovering near a six-week high versus the Japanese currency.

The greenback was up 1.2% versus the yen this week, on course for its best weekly performance since November 2018.

The dollar has also drawn support from a spike in U.S. Treasury yields, with the benchmark 10-year yield at a five-week high.

U.S. President Donald Trump said on Thursday he would not rule out an interim trade pact with China.

The two sides are preparing for new rounds of talks aimed at curbing a trade war, which has dragged on for more than a year, roiling financial markets and threatening to push other economies into recession.

The yen, widely considered a safe-haven currency, tends to rise when trade tensions worsen but reverses course and weakens when concern about trade friction eases.

Trading could be subdued in Asia on Friday as China’s financial markets are closed for a public holiday.

The euro (EUR=EBS) held steady at $1.10635, on course for its second weekly gain against the dollar.

The euro initially tumbled on Thursday after the ECB cut its deposit rate by 10 basis points to a record low of minus 0.5% and said it would restart bond purchases at a rate of 20 billion euros a month from Nov. 1.

The rate cut was widely expected, but the revived bond purchases were a surprise. Still, the single currency managed to claw back losses as the ECB’s comprehensive stimulus package now shifts the spotlight to policy meetings next week at the Fed and the BOJ.

Financial markets have fully priced in a rate cut at the Fed’s Sept. 17-18 policy meeting. Most economists expect additional monetary policy easing in October and December.

The Fed cut rates in July for the first time since 2008.

Trump has publicly criticized the Fed for not cutting rates more aggressively, but positive economic data has cast some doubt on the need for extensive easing.

The BOJ is also brainstorming ways to deepen negative interest rates at minimal cost to commercial banks, as it considers adopting it as a main policy response to a slowing economy, sources familiar with the bank’s thinking said.

The BOJ’s next policy decision is due Sept. 19.