Dollar firm on tax cut hopes, euro underpinned by rise in yields

TOKYO/SINGAPORE: The dollar was supported on Wednesday by expectations of a US tax overhaul while a sharp rise in German bond yields helped to underpin the euro.

The House of Representatives approved the biggest US tax overhaul in 30 years on Tuesday, though Congressional Republicans will likely need to hold another vote later on Wednesday because of procedural issues.

The dollar edged up 0.1 percent to 112.95 yen, having pulled away from Friday's low of 112.035, with last week's high of 113.75 seen as its next target.

But gains in the dollar were limited as many market players looked to the Bank of Japan's two-day policy meeting ending on Thursday, for clues on whether the BOJ will join the US Federal Reserve and European central banks in winding back stimulus.

A speech by BOJ Governor Haruhiko Kuroda in November  sparked such speculation when he mentioned the concept of a 'reversal rate' - a level at which low interest rates start to have more harmful side-effects than benefits.

"There is very strong interest in the 'reversal rate'. Kuroda's news conference (when the BOJ meeting ends) will be pretty much all about just that," said Yukio Ishizuki, senior strategist at Daiwa Securities.

Uncertainty over the BOJ's intentions is a major reason the yen did not slip much despite the sharp rise in US bond yields the previous day, Ishizuki also said.

At this week's meeting, the BOJ is widely expected to keep its short-term interest rate target at minus 0.1 percent and a pledge to guide 10-year bond yields around zero percent.

If anything, Kuroda may try to push back against some of the interpretations related to the issue of the 'reversal rate', said Peter Dragicevich, G10 FX strategist for Nomura in Singapore.

"We think he will probably give the market a bit of a reality check. So we're not expecting him to increase market expectations of any type of policy normalisation," Dragicevich said.

The US 10-year Treasury yield stood at 2.450 percent in Wednesday's Asian trade. On Tuesday, it had set a seven-week high of 2.472 percent, nearing a seven-month peak of 2.477 percent hit in late October.

The surge was driven in part by expectations of tax reforms raising US bond issuance, but many analysts said the immediate trigger was a jump in European bond yields on Tuesday, after Germany unveiled a plan to issue more 30-year debt next year.

Higher euro zone yields underpinned the euro, which inched up 0.1 percent to $1.1847, after rising 0.5 percent on Tuesday.

Against the yen, the euro stood at 133.79 yen, not far from strong resistance levels around 134.50.

Elsewhere, the Canadian dollar stood at C$1.2873 to the US dollar after having hit a five-month low of C$1.2920 on Tuesday.

In addition to the US dollar's general firmness, the Canadian dollar has been undermined by worries over renegotiation of the North American Free Trade Agreement (NAFTA).

Investors worry that terminating NAFTA could hurt Canada's economy and pressure its currency.

Canada sends 75 percent of all its goods exports to the United States and could be badly hit if Washington walks away from NAFTA, which US President Donald Trump has blamed for American job losses and his country's big trade deficits.