The dollar gained ground against the yen on Tuesday after a roller-coaster 24 hours which traders say may just be a precursor to three weeks of risk-packed events for the $5 trillion a day currency market.
Widely expected to rise next year on Donald Trump's promised fiscal boost for the U.S. economy, the dollar has peaked and troughed since Thursday's Thanksgiving holiday with the dominant tone some profit-taking on gains since the Nov. 8 election.
But players are also concerned about holding the euro before Sunday's Italian referendum or the yen into Wednesday's meeting of OPEC producers, despite doubts over the chances of a deal to support oil prices that would boost riskier currencies like the Aussie and Canadian dollars. Oil prices were down almost 3% on Tuesday.
Added to that is the scale of the move in global bond prices this month, which means there may be significant moves over the next 24 hours to rebalance the values of bonds, equities and particular currencies in major houses' portfolios for month-end.
"A lot of these rotations are going to occur and you’d imagine dollar assets will be sold and yen assets will be bought," said Richard Benson, co-head of portfolio investment with currency fund Millennium Global in London.
"That will dominate tomorrow along with the nervousness around the OPEC meeting. In general, we are really loaded for the next three weeks."
The dollar index, which tracks the greenback against a basket of six major rivals, inched 0.2% higher as U.S. investors began to have an influence in midday trade in London. At 101.54, it was still half a point off a nearly 14-year peak of 102.050 but a full percentage point higher at 113.04 yen. It gained 0.3% against the euro to $1.0579.
Price action over the last day suggests those investors betting on a hit to the euro from Sunday's vote in Italy are doing so by buying options contracts that pay out if the currency moves below $1.05—cheaper in capital and risk terms than holding a cash position in the currency itself.
Worries about Italy's banking system have been mounting before the vote, which could unseat the government of Prime Minister Matteo Renzi and derail his plan to refloat the banks.
However, complicated political scenarios may play out. Some wonder if Renzi's resignation will be accepted, others whether European authorities will step in quickly to ensure the banks are secure if he loses.
"The euro probably comes down a bit if he loses and last year's highs of $1.0458 are not far away," said Gavin Friend, a strategist at National Australia Bank in London.
"But we may also then see calmer heads that understand that it does not necessarily open the door to a Five Star government and a departure from the EU. The broader dollar rally also seems to have run out of a little bit of momentum. People are asking questions of Trump."
Italian lender Monte dei Paschi di Siena faces more than 8 billion euros of legal claims, and says its weakening liquidity and the potential for more bad-loan writedowns are among risks to its 5 billion-euro rescue plan.
Later on Tuesday, investors will look to data on U.S. third-quarter gross domestic product, consumer confidence and consumption for trading cues. They will be followed by the November employment report on Friday.
"We are sort of caught in a no-man's land at the moment," said Javier Corominas, an analyst with currency fund Record Currency Management in London.
"The critical dates are this Sunday, then the ECB meeting on the 8th. We are largely long dollar at the moment, through our momentum indicators. That is being offset by our medium-term value, which is not."