The euro extended gains on Tuesday on growing expectations that any concerns the European Central Bank flags about its strengthening at a meeting this week will have a limited impact.
“Any attempt to jawbone the currency lower by the ECB will be limited in its impact as the broader market expects policymakers to stick to their plan of gradually unwinding its policy stimulus,” said Peter Rosenstreich, head of market strategy at Swissquote in Switzerland.
The euro climbed 0.1 per cent to $1.1905, notching up meagre gains as most currencies traded broadly unchanged from overnight ranges as tensions over North Korea remained high.
It has gained more than 13 per cent against the dollar this year and is up more than 5 per cent on a trade-weighted index calculated by the ECB since April.
Despite those chunky gains and the large swings in favour of the euro in latest positioning data, analysts say that any pushback from ECB policymakers at their meeting on Thursday would have a limited impact.
JP Morgan strategists estimate that a halving of the outstanding long euro positions in the currency market -- a very low probability event -- would only trigger a 2 percent drop in the euro.
Political tensions kept the dollar on the back foot against the yen and the Swiss franc.
North Korea has been observed moving what appeared to be an intercontinental ballistic missile towards its west coast, South Korea's Asia Business Daily reported on Tuesday, citing an unidentified intelligence source.
The dollar's index against a basket of six major currencies slipped 0.15 per cent to 92.508.
“The market looks to have already priced in North Korea’s nuclear test. While caution towards the North conducting another missile launch is limiting the dollar’s upside, at least the market can be mentally prepared for it,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities.
South Korea’s defence ministry said on Monday it was still seeing signs that North Korea plans to launch more ballistic missiles.
“Meanwhile, there will be other factors this month that could ultimately support the dollar, such as the Federal Reserve’s policy meeting and upcoming discussions over the US debt ceiling,” Ishizuki at Daiwa Securities said.
The US Treasury Department has a September 29 deadline to raise the debt limit, a legal cap on how much the US government is allowed to borrow. Only the US Congress can raise the debt limit and expectations have risen that the ceiling would not affect Federal efforts to clean up after Hurricane Harvey.
The Swiss franc was a touch weaker at 0.9585 franc per dollar after jumping 0.7 per cent the previous day following North Korea’s nuclear test.
The Australian dollar was up 0.1 per cent at $0.7948 after the risk aversion that gripped the broader markets overnight pulled it off a one-month high of $0.7997 set on Friday.