NEW YORK (Reuters) - The dollar slumped on Monday amid geopolitical tension in North Korea, as investors braced for the annual central banking conference in Jackson Hole this week where the world’s top central bankers may signal their next policy actions.
The U.S. currency has fallen for four straight sessions against the safe-haven yen, prized for its liquidity in times of market stress. It has underperformed so far this year amid generally lackluster U.S. data and a Federal Reserve that has stuck to a gradual monetary tightening pace.
“This sustained pressure on the dollar comes just as geopolitical concerns have risen recently due in large part to the overhanging threat of North Korea’s nuclear capabilities and the ongoing troubles...plaguing U.S. President Trump and his administration,” said James Chen, head of research at Forex.com in Bedminster, New Jersey.
South Korean and U.S. forces began computer-simulated military exercises on Monday in the wake of North Korea’s weapons programs, angering the Asian communist regime. North Korea denounced the exercises as preparations for a nuclear war.
Though bets on a Fed policy change have been reduced in recent days given the general U.S. political turmoil, expectations of a Fed hike may rise if Chair Janet Yellen emphasizes on Friday that the risks to inflation goals and financial stability require careful monitoring.
“We expect nothing groundbreaking from Yellen,” said TD Securities in a note. “There is, however, some risk that she suggests financial stability should be a separate reason for the Fed to continue on its...normalization path, and this would be a hawkish surprise for markets.”
In afternoon trading, the dollar fell 0.4 percent against the yen to 108.81 yen JPY=.
The euro, meanwhile, rebounded from the day’s low to trade up 0.4 percent at $1.1810 EUR=. It held well below a 2-1/2-year high above $1.19 hit earlier this month, as markets bet the euro’s double-digit gains this year may be too much for a central bank that is still wary of removing stimulus.
Despite recent losses, it is still up more than 11 percent this year, making it the best performing currency in the G10 currency space.
Last week, it was reported that European Central Bank President Mario Draghi will not deliver a new policy message in Jackson Hole this week, which tempered expectations for the ECB to start charting the course out of stimulus.
But traders are not taking any chances. About $45 billion of euro-dollar currency options will expire in the three days leading up to Jackson Hole.
Reporting by Gertrude Chavez-Dreyfuss; Editing by Andrea Ricci