The U.S. dollar extended losses against the euro and yen after this morning??™s release of weaker-than-expected U.S. services sector data for March. The Institute for Supply Management's non-manufacturing report posted at 52.4. Economists polled by Reuters were expecting a reading of 55.0 in March, up slightly from 54.3 in February. The dollar fall was cushioned somewhat by Iran??™s announcement that it intends to release 15 British sailors and marines held captive for more than a week. Investors shrugged off yesterday??™s release of the ADP private sector employment report, which showed U.S. private employers likely added 106,000 jobs in March. Traders had expected there would be a reaction since some investors are making bets ahead of the keenly watched U.S. non-farm payrolls report on Friday.
The Japanese yen remained at five-week lows against the euro and a one-month trough versus the dollar as improving risk appetite on the back of firmer stocks prompted investors to chase high-yielding currencies anew. The carry trade is the practice of borrowing low-yielding currencies such as the yen to invest in higher-yield assets overseas. One key driver of carry trade activity has been Japanese domestic investors who, frustrated by low rates at home, purchased higher-return overseas assets abroad. Carry trades will remain at the mercy of risk appetite, but key indices were showing healthy conditions for risk, a scenario that may equate to a weaker yen going forward.
The Euro primary took its cues from other currencies and economies overnight, as markets ready themselves for central bank policy announcements and data releases set for later in the week. Expectations are for the European Central Bank (ECB) to raise interest rates again, possibly as early as June. Expect the currency to trade within its recent ranges ahead of the raft of key central bank decisions later in the week.
The British pound held steady against the dollar overnight, hovering below 2-1/2 month highs touched the previous day with investors focused on the Bank of England's two-day policy meeting and the chance of a rate hike. Data on Tuesday provided more indications of a robust economy and housing market, which should be able to weather another rise in borrowing costs from the current 5.25 percent. Further UK data is due before Thursday's decision, with service sector Purchasing Managers Index (PMI) figures for March. A strong reading could boost the argument for rates to rise this week, which would take UK interest rates above those in the U.S. and increase sterling's yield appeal.
The Canadian dollar rebounded from yesterday??™s small sell-off as oil prices came off their lows, but staying in well-defined territory ahead of key data. Crude oil futures came off their overnight lows, and were holding above $64 per barrel, enhancing the appeal of Canada's energy exporting economy and giving the currency some impetus to rise. With little on tap in terms of economic news this week, the currency has been trading within a tight range, directed by U.S. dollar flows and commodity prices.
The Australian dollar appreciated to just below its recent highs as buying on the cross against the Japanese yen continued. Risk aversion in the carry trade has seemingly eased as expectations that interest rates will rise in the near-term even though Australia's central bank kept them steady overnight. The Reserve Bank of Australia (RBA) chose to hold interest rates stead at 6.25 percent in its regularly scheduled monetary policy meeting.
The Mexican peso firmed on the back of a continuation of a rally in Mexican equity markets. The currency has appreciated for the fourth consecutive day as investors bet the government may parlay a pension reform approved last week in Congress. Signs of an easing in tensions between the US, Britain and Iran also supported the peso, as a recent calming of the political situation spurred investors appetite for risk.
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