FOREX Dollar gains on rate outlook, yen weakens for third day

The dollar gained on Wednesday as investors continued to bet on the U.S. economy outperforming peers and was higher for the third day against the Japanese yen, keeping investors wary of the risk of intervention from Tokyo.

In Europe, the Swedish crown came under pressure after the central bank cut interest rates and said it expected two more cuts this year, while the pound was stuck in negative territory ahead of a Bank of England meeting on Thursday.

The move in Sweden was a reminder that dollar is likely to remain strong as long as other central banks cut rates before the U.S. Federal Reserve.

The yen remained front of mind for currency traders as Japanese officials issued a stronger warning over the impact of the weak currency on the economy.

“Carry trades are still attractive and the market is still more inclined to buy the dip in dollar/yen,” said Vassili Serebriakov, an FX strategist at UBS in New York.

“I don’t think the market is ignoring the risk of intervention, but …unless there’s a significant change in the U.S. economic outlook we don’t think there will be a significant change in the setup for the FX markets either,” Serebriakov added.

Analysts have said any intervention from Tokyo would only offer temporary respite for the yen, given the wide gap between interest rates in the U.S. and Japan.

Traders believe Japanese authorities spent some $60 billion last week on propping up the yen after it hit its weakest in 34-years against the dollar around 160 yen.

The dollar was last up 0.61% against the yen at 155.63 , up from last week’s low of 151.86.

FED CONQUERS ALL

Investors are focused on the pace and timing of Fed rate cuts. The latest data showing weaker-than-expected U.S. jobs creation, together with an easing bias from the U.S. central bank, have cemented expectations that rates will likely be lower by year-end.

The dollar was last up 0.1% at 105.53 against a basket of currencies , above last week’s one-month low.

In the meantime, central banks in Europe have already started cutting interest rates. The Swiss National Bank cut in March ahead of Wednesday’s move by Sweden’s Riksbank.

The European Central Bank has signalled its intention to cut in June, assuming the data points in the right direction, and the BoE is gradually smoothing the way to its first cut.

“What we’re looking at is a raft of European central banks going over the next few months, whether or not it’s June, or August. We’ve got a near 50% chance of the Fed cutting in September, but I think that’s probably the one that could get pushed out,” XTB research director Kathleen Brooks said.

“For now, and particularly today, the focus is on Europe cutting first and we’re seeing that upward pressure on the dollar,” she said.

While traders are pricing in an expected Fed rate cut in September, that move will also depend on whether inflation continues to ease back closer to the U.S. central bank’s 2% target.

“Its going to be hard to go more dovish from here in terms of Fed expectations I think in the near term and that’s why that bias to buy the dollar is still going to be in place,” said UBS’ Serebriakov.

The euro was down 0.02% at $1.075.

Sterling weakened 0.22% to $1.2475.

In cryptocurrencies, bitcoin fell 0.91% to $62,395, set for a fourth daily loss, its longest stretch of daily declines so far this year.