Currencies: Dollar rebounds slightly as 3-day government shutdown comes to a halt

The dollar moved slightly higher on Tuesday, taking a breather from its recent selloff as traders welcomed the end to the U.S. government shutdown.

Meanwhile, the yen rose against all other major currencies after the Bank of Japan struck a relatively upbeat tone in its monetary policy assessment.

What are currencies doing?

The ICE U.S. Dollar Index DXY, +0.07%  rose 0.1% to 90.445, recouping a portion of its Tuesday losses. The greenback fell 0.2% in that session as losses built through the day, although it pared declines after a congressional vote to end a three-day government shutdown.

The yen USDJPY, -0.46%  advanced, with the dollar buying ¥110.63, down from ¥110.92 late Monday in New York.

The pound GBPUSD, -0.2502%  fell to $1.3942, after reaching the key $1.40 level overnight. Sterling bought $1.3987 late on Monday.

The euro EURUSD, -0.0489%  slipped to $1.2245 from $1.2262 on Monday.

What is driving the market?

The dollar pared losses late in Monday’s session and continued the upward trend higher on Tuesday after the U.S. Congress passed a three-week funding measure that brought a halt to the three-day shutdown. The bill, also signed by President Donald Trump, keeps the U.S. government running up to Feb. 8, but has done little to resolve the underlying policy fights between the Democrats and the Republicans.

That means a similar shutdown could happen when the three-week stopgap bill expires if the two parties fail to reach an agreement on government-spending levels and immigration.

The dollar index is still trading close to a three-year low, as investors start to price in tighter monetary policy in major economies outside the U.S. However, some analysts say the greenback could enjoy a short-term rebound, especially if the euro pulls back from its recent rally. The next big event for the shared European currency is European Central Bank meeting on Thursday.

The Bank of Japan on Tuesday kept policy on hold, but analysts said the central bank signaled a more upbeat stance on the economy. In the BOJ’s quarterly outlook report, officials noted that “inflation expectations have been more or less unchanged”, while in October they said “inflation expectations have been in a weakening phase”.

What are strategists saying?

“For now at least the BOJ has done a pretty good job of keeping the lid on the yen bulls. Inflation projections remained unchanged (1.4% in 2018 and 1.8% in 2019) although there was a slightly more upbeat tone than before,” said Neil Wilson, senior market analyst at ETX Capital, in a note.

“This is the same quandary as that facing the ECB — any suggestion of normalizing will lead to further yen strength and that will result in de facto premature tightening, making the BoJ’s eventual exit even further away,” he added.

In terms of the dollar, currency strategists at Morgan Stanley in a note said they expect the buck to develop a temporary rebound after its sharp decline over the last month.

“The projected short-term USD lift may come from the EUR side. The start of German coalition talks see the position of the SPD leader complicating the talks and its outcome is by no means certain as SPD party members will have to vote on the outcome,” they said.

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