Dollar edges lower as risk sentiment rises; Yen in demand

© Reuters.

By Peter Nurse 

Investing.com - The U.S. dollar weakened Thursday given the risk-on sentiment, while the Japanese yen remained in demand in the wake of the Bank of Japan's shock policy shift.

At 03:25 ET (08:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, fell 0.4% to 103.460, trading close to a six-month low. 

The dollar traded on the back foot Thursday due to a pickup in risk sentiment after upbeat data, released Wednesday, showed U.S. consumer confidence rose to an eight-month high in December. 

Attention later in the session will turn to the release of third quarter U.S. gross domestic product growth, which is expected to remain the same as the last reading, at 2.9%, and the weekly unemployment claims, which are expected to rise slightly from the prior week.

USD/JPY fell 0.5% to 131.88, with the yen remaining near a four-month high, in the aftermath of the BOJ's decision to allow the 10-year bond yield to move in a wider band.

"Closing the year above 130.00 may be a welcome development at the BoJ as it could signal that speculation on further policy normalisation has – for now – been kept in check," said analysts at ING, in a note.

Elsewhere, EUR/USD rose 0.5% to 1.0655, helped by the general positive sentiment.

"We think EUR/USD may find some stabilisation around 1.0600 into year-end as volatility starts to drop. A drop to sub-1.0500 levels is, however, possible should market sentiment deteriorate, especially on the energy side," ING added.

GBP/USD rose 0.5% to 1.2144, climbing even after data showed that Britain's economy contracted by a little more than first estimated in the third quarter of this year, data showed Thursday.

Economic output fell by 0.3% in quarterly terms during the July-September quarter, compared with a previous estimate of 0.2%, the Office for National Statistics said.

"We continue to see mostly downside risks for the pound in the new year, as a recessionary environment and sensitivity to market instability may cause a return to the 1.15-1.18 range in cable," ING added.

The risk-sensitive AUD/USD rose 0.8% to 0.6760, while USD/CNY edged lower to 6.9802, with sentiment towards the yuan remaining weighed down by the spread of COVID-19 across the country.