The U.S. dollar climbed to a fresh 34-year peak against the yen in quiet trading on Monday, with investors taking their cue from the Federal Reserve's higher-for-longer interest rate stance, even as they remained alert to any signs of intervention by Japan to prop up its struggling currency.
The dollar rose to 154.85 yen versus the Japanese currency,
its highest since mid-1990. It was last up 0.1% at 154.82 yen, a whisker away
from the 155-level that is next on traders' radars for possible intervention.
The yen hit fresh lows ahead of the Bank of Japan's (BOJ)
policy meeting on Friday.
Market players took note of the fact that Japan has
refrained from intervening in the currency market despite the yen hitting
several 34-year lows this year.
"I think the MOF (Ministry of Finance) has acknowledged
that currency fundamentals have been moving in the wrong direction, i.e.
dollar/yen has been going higher because U.S. yields have been
going...higher," said Calvin Tse, managing director and head of Americas
macro strategy at BNP Paribas in New York.
"I think they've been very wary to stand in the way of
that. However, if we see an environment where, let's say U.S. yields start to
weaken ... then that provides them, at least in their (MOF) minds, with a
window of opportunity to act. So long story short, I don't think they will be
intervening if the ... driver of dollar/yen is higher U.S. yields," he
added.
In late afternoon trading, the dollar index, a gauge of the
greenback's value against six major currencies, was flat to slightly higher at
106.13 . It was off five-month highs hit last week after comments from Federal
Reserve officials and a run of hotter-than-expected inflation data forced a
paring back of U.S. rate-cut expectations.
Cooling Middle East tensions, which had driven the dollar,
gold and oil sharply higher on Friday and battered stock markets, also helped
temper volatility. Tehran downplayed Israel's retaliatory drone strike, in what
appeared to be a move aimed at averting regional escalation.
Last week, Deutsche Bank's index of currency volatility hit
7.18, the highest level since February. On a weekly basis, the volatility index
rose 9.7%, its biggest gain since June 2023.
WEAKER EURO
Besides the BOJ meeting, the market is looking at U.S.
first-quarter gross domestic product data on Thursday and the inflation metric
the Fed targets, the personal consumption price expenditures (PCE) index, due
out on Friday.
Markets are expecting a 0.3% increase in the headline PCE
number in March, unchanged from the previous month, and a year-on-year gain of
2.6%, compared with 2.5% in February, according to a Reuters poll.
"A hot number puts the Fed in a tricky spot since it
starts to run out of runway ahead of the November election," wrote TD
Securities in a research note led by Mark McCormick, global head of FX and EM
strategy.
In addition, TD added that a combination of higher inflation
and risk-off sentiment increases the chances of former U.S. President Donald
Trump's victory.
"That outcome could see the market price in Fed hikes
next year, reflecting a mix of corporate tax cuts and tariffs - both
inflationary," the TD report said.
The issue of the strong dollar also prevailed at last week's
International Monetary Fund and World Bank spring meetings in Washington, and
the U.S., Japan and South Korea released a rare joint statement on the issue.
A rethink on Fed policy easing has led to a general
repricing of global rate-cut timelines, but expectations for the European
Central Bank (ECB) and the Bank of England (BoE) to start cutting by the middle
of this year are still intact.
The euro , which is heading for its biggest monthly drop
against the dollar since January, was little changed at $1.0651, while sterling
slipped 0.1% to $1.2352.
In cryptocurrencies, bitcoin was last up 3.6% at $66,384.
The world's largest cryptocurrency completed its "halving" at the
weekend, a phenomenon that happens roughly every four years and aims to reduce
the rate at which bitcoins are created.
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