NEW YORK: The dollar hit an 11-month high against the Japanese yen on Monday and an almost 10-month high against a basket of currencies after the Federal Reserve last week signaled that it could raise interest rates further and is likely to hold them higher for longer.
The hawkish rate outlook from the Fed sent US Treasury yields higher and boosted demand for the greenback.
The yen was also hurt after the Bank of Japan on Friday maintained ultra-low interest rates and its pledge to keep supporting the economy until inflation sustainably hits its 2% target, suggesting it was in no rush to phase out its massive stimulus program.
“According to BoJ Governor Kazuo Ueda there was no sign yet of stable inflation on a sustainable basis so that the BoJ will patiently continue with monetary easing under the current framework. That was a clear dampener for the yen,” said Esther Reichelt, FX analyst at Commerzbank.
The dollar reached 148.87 yen, the highest since Oct. 25.
The Japanese currency remained within striking distance of 150, a level which some market watchers saw as a line in the sand that would spur forex intervention from Japanese authorities similar to that of last year.
The yen is also suffering as the gap between 10-year Treasury and Japanese bond yields widens, with the US debt yields rising at a faster pace than Japan’s.
“The US is underperforming relative to Japan,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto.
“Whenever we do see this widening in Treasury versus JGB yields, especially for 10s, that tends to transmit into dollar/yen a little bit more forcefully,”
The dollar index hit 105.97, the highest since Nov. 30.
The euro dropped to $1.06550, the lowest since March 16. The euro is weakening against the US dollar on the view that the European Central Bank is unlikely to raise rates further.
“Whereas the Fed is still very data dependent, and meeting by meeting, the ECB has basically signaled that they are at terminal right now, so even that slight subtle shift in tone between the two central banks in our minds is enough to keep the euro/dollar somewhat anchored for now,” Rai said.
Chicago Fed president Austan Goolsbee said on Monday that inflation staying stuck above the Fed’s 2% target remains a greater risk than tight central bank policy slowing the economy.
Meanwhile, with central banks globally indicating they are likely to hold rates higher for longer, traders are focusing on potential problem areas.
These include housing markets in Australia, Canada and New Zealand, where floating rate mortgages are common.
Those concerns are “potentially keeping the dollar a little bit firmer on an index level basis,” said Rai.
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