Dollar shines on US economic resilience

SINGAPORE: The dollar pushed the yen deeper into intervention territory on Thursday as a resilient U.S. economy underscored the need for higher-for-longer interest rates, while a strikingly ultra-dovish Bank of Japan struggled to defend its policy stance.

The Australian dollar tumbled after the country's July employment unexpectedly fell while its jobless rate ticked up more than expected.

The Aussie sank nearly 1% after the release of the figures, dragging the New Zealand dollar alongside it.

The yen bottomed out at 146.565 per dollar in early Asia trade, its lowest level since November, having come under renewed pressure as a result of interest rate differentials between the U.S. and Japan.

Although most money markets expect the Federal Reserve to keep interest rates on hold in September, with some betting that the central bank may already have completed its tightening cycle, a recent run of resilient U.S. economic data has reinforced the view that interest rates will remain at restrictive levels for some time.

Data on Wednesday showed that U.S. single-family homebuilding surged in July and permits for future construction rose, while a separate report revealed production at U.S. factories unexpectedly rebounded last month.

"We've got the U.S. staying really resilient still, under the weight of high interest rates," said Carol Kong, a currency strategist at Commonwealth Bank of Australia (CBA).

"Even though inflation has come down a long way, it is still some way away from (the Fed's) 2% target, so I think the FOMC will have to be patient and maintain monetary policy at a restrictive level in order to win that last mile against inflation."

That spells trouble for the yen, which has struggled in the face of growing interest rate differentials since the Fed began its tightening cycle last year, while the BOJ continues to maintain ultra-low interest rates in Japan.

The Japanese currency has come under close watch since it touched the key 145 per dollar level for the first time in about nine months last Friday, crossing into a zone that sparked an intervention by Japanese authorities in September and October last year.

"That sharp rise in dollar/yen definitely has increased the risk that the Japanese authorities will have to step into the FX market again to support the yen," Kong said.

Elsewhere, the euro fell 0.07% to $1.08695, while sterling dipped 0.1% to $1.27195.

Despite a sharp drop in Britain's headline inflation rate, key measures of price growth monitored by the Bank of England failed to ease in July, data on Wednesday showed.

"We expect 25-basis-point rate hikes in both September and November, for a peak policy rate of 5.75%," said Wells Fargo economist Nick Bennenbroek of the Bank of England's monetary policy outlook. "Our view remains for slower UK growth and, eventually, a mild UK recession."

IN THE DOLDRUMS

The Australian dollar fell as much as 0.9% to a low of $0.6365 after the release of its employment figures, while its New Zealand counterpart slid more than 0.5% to $0.5903, both their lowest levels since November.

"Cracks are finally appearing in the employment data, and that should clear up any doubt over whether the (Reserve Bank of Australia) is done hiking," said Matt Simpson, senior market analyst at City Index. "They're done at 4.1% as far as I'm concerned now, with persistently weak data from China and easing from the (People's Bank of China) adding to the case of a peak rate."

The two antipodean currencies, often used as liquid proxies for the yuan, have also taken a beating over the past few sessions as a result of the darkening outlook over China's economy.

The offshore yuan hit a fresh nine-month low of 7.3470 per dollar.

"Given the sharp deterioration in the Chinese economy ... there's now a higher sense of urgency among policymakers, so I think there is now a higher likelihood that they will be forced to announce some more material fiscal stimulus package," said CBA's Kong.

The U.S. dollar index touched a two-month high of 103.59.