Aussie inches up as RBA reaffirms more hikes ahead, yen struggles

© Reuters. FILE PHOTO: An Australia dollar note is seen in this illustration photo June 1, 2017. REUTERS/Thomas White/Illustration

By Alun John

HONG KONG (Reuters) - The Australian dollar edged up a fraction after remarks from the central bank governor pointing to more rate hikes down under, but fears of slowing global growth capped gains, while the Japanese yen retested a 24-year low.

More broadly, investors in currency markets remain heavily focused on central bank action globally and the prospect of aggressive interest rate rises.

The Aussie was 0.26% higher at $0.6954, extending the previous day's small gains, after Reserve Bank of Australia (RBA) Governor Philip Lowe signalled a lot more policy tightening ahead.

RBA minutes from its June meeting, at which the central bank raised rates by a larger than expected 50 basis points, highlighted the central bank's concerns about inflation.

However, analysts said the longer term trajectory of the currency would be driven more by the global growth outlook, which did not look positive for the Aussie.

"I think the bigger driver for the Aussie will be global factors rather than local influences, and we are now forecasting the U.S. dollar to increase this year based on our expectation for a sharp slowdown. We think the Aussie will push to 65 U.S. cents by the end of this year," said Carol Kong, an FX strategist at Commonwealth Bank of Australia (OTC:CMWAY).

Elsewhere the Japanese yen remained under pressure at 135.1 yen per dollar, not far off a 24-year low of 135.58 yen hit early last week, after the Bank of Japan on Friday dashed any mild expectations of a change in policy and renewed its commitment to ultra-easy monetary settings.

The euro was little changed at $1.0516, as Monday's remarks from European Central Bank President Christine Lagarde about the need to nip the risk of financial fragmentation between euro countries in the bud, eclipsed the negative drag of French President Emmanuel Macron losing his parliamentary majority.

Broadly higher risk sentiment across markets, with U.S. equity futures up over 1%, also supported the Aussie and the euro. [MKTS/GLOB]

The dollar index, which tracks the greenback against six major peers, was a touch lower at 104.38.

The major event for the dollar this week is Federal Reserve Chair Jerome Powell's semi-annual two-day report to Congress, which kicks off on Wednesday.

Two other Fed policymakers are due to make public remarks later on Tuesday, as well as two speakers from the Bank of England, with traders watching their remarks closely for clues about the interest rate trajectory.

Sterling was at $1.227, climbing from last week's over two-year low of $1.1934.

Bitcoin was at $20,500 having failed to break strongly above or below the psychologically significant $20,000 level in recent days.