Yen eases despite intervention threat, as RBA keeps interest rates steady

At the RBA's last meeting in mid-March, policymakers watered down their tightening bias, although Bullock declined to say whether policy has shifted to neutral

The yen continued to drift lower against the dollar on Tuesday as gaping interest rate differentials weighed on the currency, despite fresh warnings from Japanese officials following two rounds of suspected dollar-selling intervention last week.
 

The Australian dollar eased back from near a two-month high versus its US counterpart after the Reserve Bank of Australia kept rates steady as widely expected, and refrained from ramping up hawkish signals in its policy statement.
 

The Aussie slipped 0.36 per cent to $0.6601, backing away from Friday's high of $0.6650, a level previously seen on March 8.

"It was a bit of 'Buy the rumour and sell the fact,'" said James Kniveton, senior corporate FX dealer at Convera.
 

"Markets were prepared for a bit of hawkishness but the statement was a bit bland."
 

Attention now turns to Governor Michele Bullock's press conference, set for 0530 GMT.

The US dollar gained 0.44 per cent to 154.5635 yen, adding to its 0.58 per cent rally from Monday.

On Friday, it sank as low as 151.86 yen for the first time since April 10, as softer-than-expected monthly US jobs data fed losses following Bank of Japan data that suggested official intervention could have amounted to some 9 trillion yen ($58.37 billion).
 

Japan's finance ministry has refrained from commenting on whether it was behind the dollar selling, but top currency diplomat Masato Kanda repeated on Tuesday that the government "will continue to take the same firm approach" to disorderly yen moves.
 

He also acknowledged that an orderly market would not require the government to step in, however, which some analysts took as a signal that intervention risks had lessened.
 

The carry trade remains a draw, with a Federal Reserve rate cut likely to take some time and the BOJ following a cautious approach to tightening after its first rate hike since 2007 in March, leaving a vast gap of 370 basis points between ultra-low Japanese long-term yields and their US counterparts.
 

At the same time, DBS analysts estimate that even after last week's bounce, the yen is still the most undervalued currency in the G-10 grouping, while the dollar remains "highly overvalued".
 

In a client note, they wrote, "We expect Japan to continue leaning against excessive JPY weakness." The US dollar index - which measures the currency against six major peers, including the yen, sterling and euro - ticked 0.04 per cent higher to 105.19, after dipping as low as 104.52 on Friday.
 

The euro was steady at $1.07655 and sterling eased 0.07 per cent to $1.2552.