The Dollar Has Reached a Six-Week High Against the Yen Ahead of US Inflation Data
In slow trading on Monday, the dollar rose to six-week highs against the rate-sensitive Japanese yen on expectations that the Federal Reserve will keep monetary policy tighter for longer, sending short-term US Treasury yields higher. The US dollar, on the other hand, fell against most currencies as investors reduced their long dollar positions following a strong rally last week. The week's main event, the release of US consumer price data on Tuesday, which loomed over Monday's trading, will either challenge or reinforce expectations for US rates to remain higher for longer.
"The Fed appears to be continuing its rate hikes. Last week, (Fed Chair Jerome) Powell hinted at a higher peak rate if the labor market remained strong "Erik Bregar, director of foreign exchange and precious metals risk management at Silver Gold Bull in Toronto, agreed. "Last week's Fed speech struck me as hammering home higher rates for a longer period. That is why the US dollar has gained traction over the last week and a half." The dollar rose to 132.91 yen, its highest level since January 6. It was last trading at 132.69 yen, up nearly 1%. The dollar tracked the rise in the two-year US Treasury yield, which was last up three basis points (bps) at 4.542%, after reaching its highest since late last year.
"The market does not want to be short the dollar/yen ahead of tomorrow's CPI," said Marc Chandler, chief market strategist at Bannockburn Forex in New York. In Asia trading, the euro hit a one-month low of $1.0656 before closing at $1.0718, up 0.4%. After hitting a one-month low of $1.1961 last week, the British pound gained 0.6% to $1.2133. The dollar index, which measures the value of the US currency against six major currencies, is now at 103.35, down 0.2%. "We have a nice pullback in the US dollar after a strong rally last week," said Chandler of Bannockburn. "I don't believe we've yet removed key levels.
But, following last week's moves and ahead of tomorrow's CPI, we're consolidating some positions." Higher US yields were a major driver of the yen's weakness. The benchmark 10-year US Treasury yield hit a new six-week high of 3.755% on Monday, while the two-year yield hit its highest level since late November, at 4.56%. Last year, the Japanese yen fell sharply to a 32-year low of 151.94 per dollar as US interest rates rose while Japanese rates remained near zero. It has gained ground this year as US interest rates appeared to be nearing their peak and as expectations grew that the Bank of Japan would exit its ultra-easy stance, but both scenarios appear to have been postponed.
According to sources, former Bank of Japan board member Kazuo Ueda is set to become the next governor. In an interview the same day, Ueda stated that the BOJ's current ultra-easy policy was appropriate. In the United States, much stronger job data released at the beginning of February suggests that the economy is performing well, implying that the Fed is more likely to keep rates high. As a result, the release of the US CPI report on Tuesday will be critical.
Money markets expect U.S. interest rates to peak at 5.2% around July, compared to the Fed's current target rate of 4.5-4.75%, but have largely discounted major rate cuts later in the year. In other news, the Swiss franc strengthened after higher-than-expected Swiss inflation data. The dollar dropped as low as 0.92 Swiss francs before closing down 0.3% at 0.9210 francs.