US recap: Dollar off with risk on before Tuesday’s key event risks

May 15 (Reuters) – The dollar retreated along a broad front on Monday, correcting risk-off-driven gains at the end of last week while markets braced for Tuesday’s US retail sales report and the next US debt ceiling talks.

A weak but highly volatile NY Fed report was taken with a grain of salt, while most of Monday’s Fed speakers pushed back against market expectations of rate cuts this year.

The dollar index’s 0.25% loss was a mirror image of EUR/USD’s gains, with both having tangled with dollar resistance levels on Friday and Monday.

The real action in FX Monday was between rebounding high beta currencies, such as the Australian dollar, and the lowest beta yen, with AUD/JPY gaining more than 1%, while USD/JPY managed just a 0.22% gain.

The risk-on bias was aided by hopes China will increase stimulus to help revive growth, but also on speculation that, in the end, the US will manage not to score a crisis-inducing own goal by defaulting on its own debt.

An actual default, not just delayed payments to those other than Treasury debt holders, would weaken the dollar’s standing as a reserve currency, though the market appears to expect that the worst will be averted.

Also, a plus for risk-taking was a bounce in beleaguered US bank stocks.

Sterling, which hues more closely to risk acceptance flows, and with employment and particularly wage data out Tuesday that could keep the BoE hiking, rallied throughout the day and accumulated a 0.65% rise.

USD/JPY’s 0.2% gain came after the 136.32 early high on EBS held by the May 2 low at 136.33, with May 2’s 137.78 high, by March’s 137.90 peak, triggering the three-day plunge to 133.50.

Hopes of the BoJ’s policy review reducing accommodation were dimmed by the government’s lukewarm reception to the plan.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)