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The yen stumbled against the US dollar on Tuesday after Bank of Japan (BOJ) Governor Haruhiko Kuroda announced a likely further softening on policy, while the euro’s gains were kept in check as focus returns to economic issues in the eurozone.

The greenback advanced 0.1 percent to 110.81 against the safe-haven currency, recovering from a low of 110.45 registered earlier in the session.

The yen climbed sharply at the end of 2018 as the fall in risk appetite prompted traders to wind down carry trades funded in the Japanese currency. The yen had largely spent this year shedding those gains until turning up last week’s unexpectedly disappointing US economic data.  

Against a basket of six major currencies, the dollar index slightly dropped 0.02 percent to $96.718, after ending the previous session unchanged. US financial markets were closed on Monday for the Presidents’ Day holiday.

The mild lift on the greenback came after Kuroda stated that the BOJ was prepared to raise stimulus if sharp yen increases weigh down the economy and derail the course towards reaching its 2 percent inflation target.

Kuroda’s comments came at a time when several central banks, including the Federal Reserve, have become dovish in the face of growing global economic risks.

Still, the he said Japan’s central bank would carefully weigh the benefits and costs of any further policy easing, which could mean BOJ faces a huge hurdle in topping up policy seeing how financial institutions’ profits have been knocked down by years of near-zero interest rates.

Kuroda said if currency moves are having an impact on the economy and prices, and if they consider it necessary to achieve their price target, they will consider easing policy.

Slowdown Concerns Cap Euro’s Gains

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Meanwhile, the euro bounced back above $1.13, although gains were capped ahead of an inundation of data over the next few days that will prove whether the loss of momentum has bottomed out or is getting worse.

The euro was up 0.01 percent to 1.1309 against the dollar. The single currency rose 0.16 percent overnight, distancing from a three-month decline of 1.1234.

The euro has strengthened as investor sentiment perked up on growing hopes for an easing of the trade dispute between the world’s two largest economies. The US and China has both reported progress in talks.

The dollar, the most liquid currency, is usually optimistic during a period of investor nervousness.

The euro’s latest bounce was not based a positive incentive specific to the currency and the market will likely return to pricing the potential negatives. The euro will remain on a shaky footing, according to Chief Forex Strategist Masafumi Yamamoto.

Yamamoto added that there is still some way to go before potential negatives are factored into the euro ahead of the March 7 European Central Bank (ECB) meeting.

With the euro zone experiencing its biggest slowdown in half a decade, the bank’s staff is expected to revise growth and inflation forecasts during next month’s meeting.

Euro zone bond yields, particularly those of German bonds, have weakened amid the darkening European economic outlook, sending the euro in red territory.

The Fed’s recent change to a dovish tone was likely to influence ECB’s monetary policy.

Chief Currency and Foreign Bond Strategist Makoto Noji stated that if the Fed were to lower interest rates, it would be natural to assume that the ECB would follow suit, and the German 10-year yield will likely fall into the negative if expectations for a rate cut by the ECB increases.

The German 10-year bond yield stood at 0.099 percent on Tuesday. It advanced 0.110 percent the previous day after hitting 0.077 percent on February 8, its lowest since October 2016, due to sharp reductions to the European Commission’s euro area economic growth projections.

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