Dollar hovers near two-week high, eyes policy divergence for support in 2016

By Shinichi Saoshiro

TOKYO (Reuters) - The dollar hovered near a two-week high against a basket of currencies on Monday in the first trading session of 2016, a year in which the market expected divergence in central bank monetary policies to give the greenback an edge over its peers.

The dollar index, a gauge of the greenback's strength against a basket of key currencies, stood little changed at 98.727. A rise above 98.778 would take the index to its highest since Dec. 21.

The index gained roughly 10 percent last year as the Federal Reserve began hiking interest rates for the first time in almost a decade, while the European Central Bank and the Bank of Japan were stuck with very loose monetary policy schemes and expectations of even further easing.

"The FX market will likely start 2016 with a strong sense of deja vu, as many themes from last year remain firmly in place," wrote strategists at Barclays.

"Most notable are the monetary policy divergence led by the Fed, lower commodity prices and the role of a weaker China/emerging markets in the global recovery."

The U.S. currency was steady at 120.305 yen . A break below 120.005 would take the dollar to its lowest since late October.

The dollar has eased steadily against the yen over the past few sessions as risk appetite has been hit by factors such as sliding crude oil prices.

While U.S.-Japanese monetary policy divergence is seen favouring the dollar, risk aversion stemming from lower commodities and prospects of weaker Chinese economic growth could boost the safe-haven yen.

The greenback fared better against the euro on Monday. The common currency was flat at $1.0852 after briefly slipping to $1.0845, its lowest since Dec. 18.

The Australian dollar treaded water at $0.7290 . The Aussie lost roughly 12 percent in 2015 on factors including lower commodity prices, rate cuts by the Reserve Bank of Australia (RBA) and prospects of slower growth in China.

Whether the RBA sees the need for further easing and Chinese economic performance are seen dictating the pace of the Aussie in 2016.

The New Zealand dollar was up 0.1 percent at $0.6831 . The kiwi also suffered a loss exceeding 10 percent in 2015, but dairy prices showed signs of bottoming out last year and analysts reckon this could give it a leg up over the Aussie in 2016.

(Reprotint by Shinichi Saoshiro; Editing by Kim Coghill)