Euro slips ahead of ECB policy meeting, dollar gains

USD/JPY was up 0.2 percent at 120.570 yen, having rebounded sharply from a low of 119.255 overnight.

EUR/USD dipped to $1.1216, adding to an overnight loss of 0.8 percent.

The rise and fall in global risk appetite, heavily influenced by Chinese economic data and its volatile stock markets, have recently influenced the greenback’s day-to-day direction.

Global stock indexes extended gains Thursday after receiving a midweek lift from reports of brokerage measures in China, whose financial markets are closed Thursday and Friday for holidays, to invigorate the country’s battered markets. Tokyo’s Nikkei climbed 1.4 percent.

China’s slowing economy and worries about global growth had prompted investors to reduce bets in the yen and the euro, both of which have been popular for funding trades involving the sale of low-yielding currencies to buy higher-yielding, but riskier, assets.

Stock market gains have tended to slow unwinding of such “carry trades”, exposing the dollar to higher volatility.
Currently, a strong case to go long on the yen and euro against the dollar does not exist, with the possibility of the Federal Reserve hiking rates in September still alive. A clear trend has not formed and that is part of the reason the dollar moves along daily with each turn in equities.

With Chinese markets closed, the focus will be on the European Central Bank policy meeting later in the session and on what its officials make of recent turmoil in financial markets.

“We expect a dovish message in the press conference and believe further easing is likely before year end. Such a message should support sentiment, which so far has been a drag on risky assets,” strategists at Barclays wrote.

Traders expected the continued Chinese market closure on Friday to reduce volatility in the region’s financial markets ahead of the closely watched U.S. non-farm payrolls report due that day.

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