FX Rate News

The dollar edged up on Thursday supported by expectations for aggressive Federal Reserve monetary tightening, but was well off the previous day’s peaks amid nervousness about what a gathering of finance ministers might say about its rapid appreciation.

The greenback added 0.08% to 128.335 yen, at one point hitting a two-decade high of 129.430 overnight as the Bank of Japan (BOJ) stepped in to the bond market for the third time in three months to defend its zero-percent yield target, drawing a stark contrast with the Fed’s increasingly hawkish posture.

However, the dollar index — which measures the currency against six peers including the yen — ticked down 0.46% to 99.93, following its retreat in the previous session from a more than two-year peak of 101.03.

Also allowing the dollar to ease overnight, benchmark Treasury yields pulled back from the highest level since December 2018 at close to 3%, as dip buyers emerged. Those yields, though, also inched higher in Tokyo trading on Thursday.

“Few central banks will match the Fed this year for policy hikes and balance sheet retrenchment, making for a dramatic policy differential in the USD’s favour,” Westpac strategists wrote in a client note.

The dollar index “should remain bid in this environment, with talk of 101-102 likely to increase near term,” they said.

San Francisco Fed President Mary Daly said on Wednesday she believed the case for a half-percentage-point rate hike next month is “complete” and “solid”, adding to recent comments from other Fed officials backing bigger rate increases.

Markets are currently priced for half-point increases in both May and June.

By contrast, the BOJ on Wednesday offered to buy unlimited amounts of10-year Japanese government bonds for four consecutive sessions as yields bumped against the 0.25% maximum leeway around its zero-percent target, showing its commitment to ultra-easing stimulus settings ahead of its policy meeting next week.

BOJ Governor Haruhiko Kuroda has stuck to the view that a weak yen is overall good for the economy, but admitted earlier this week that moves had been “quite sharp” and could hurt Japanese companies’ business plans.

Finance Minister Shunichi Suzuki has been more categorical, saying on Tuesday that the damage to the economy from a weakening yen at present is greater than the benefits, in his strongest statement yet.

He is due to meet U.S. Treasury Secretary Janet Yellen this week on the sidelines of the Group of 20 financial leaders’ gathering in Washington D.C., prompting traders to pare back bearish yen bets on the potential for stronger rhetoric on the currency.

Japanese policy makers “have not fully utilized their verbal intervention toolkits yet — the next phase would typically involve describing moves as ‘speculative’ and threatening to ‘take decisive action,’” Adam Cole, chief currency strategist at RBC Capital Markets, wrote in a research note.

“If we get to that point, the hurdle for the next logical step of physical intervention may be lower than generally perceived.”

But on whether intervention would work, he said it “could restore some short-term balance to markets and manage the pace of JPY depreciation (but) longer-term, there is no prospect of the BOJ mopping up all of the JPY selling we anticipate from within Japan as the Fed hiking cycle gets properly underway.”

Elsewhere, the euro eased 0.11% to $1.08425, while sterling slipped 0.14% to $1.30555.

The Australian dollar retreated 0.20% to $0.7436.

The New Zealand dollar sank 0.40% to $0.67755, hurt by softer-than-forecast consumer price data.

The Japanese yen hit a 20-year low against the dollar on Tuesday, supported by high U.S. Treasury yields and likely comparatively good U.S. economic data this week.

The dollar rose 0.37% on the yen to 127.44 yen in early trade, its highest level since May 2002.

It has risen 4.5% on the Japanese currency so far this month, which would be its second-biggest monthly percentage gain since 2016 behind March’s 5.8%.

The dollar was also firm against most other currencies and the dollar index was at 100.8, just off Monday’s two-year high of 100.86.

“I think the broad dollar trend reflects U.S. economic outperformance, while we’ve seen some initial impacts of higher energy prices from the Ukraine war elsewhere, especially in the euro zone,” said Carol Kong, FX strategist at Commonwealth Bank of Australia.

She added that she was watching purchasing manager index data due in several markets on Friday.

“If we get weak PMI numbers in the euro zone or elsewhere, then markets could potentially downgrade their economic expectations but I don’t think the US PMI will be particularly weak so we’ll see some contrast there, which would probably support the dollar,” she said.

“Of course, the big driver for dollar yen has been surging U.S. bond yields.”

The benchmark U.S. 10-year Treasury yield on Tuesday was hovering just off its three-year high of 2.884% hit Monday, while the Bank of Japan has been intervening to keep the yield on Japanese 10 year government bonds around 0% and no higher than 0.25%.

Japan was watching how the weakening yen may affect the economy, as stability in the currency market was important, Finance Minister Shunichi Suzuki said on Tuesday, reiterating earlier remarks by several politicians and officials.

The euro was at $1.0776, testing last week’s two-year low of $1.0756, and sterling was also soft at $1.3006, not helped by the latest fighting in Ukraine.

Ukraine said Russia had started an anticipated new offensive in the east of the country.

Elsewhere, the Australian dollar edged up from Monday’s one-month low and was at $0.7355.

Bitcoin also managed to find its feet, trading around $40,800 on Tuesday after hitting a one-month low of $38,547 on Monday.

The Japanese yen weakened past the 126 yen per dollar mark on Wednesday for the first time since 2002 while the euro was pinned at a one-month low as investors flocked to the U.S. currency after some hawkish comments by Federal Reserve officials.

Though U.S. monthly underlying inflation pressures showed some signs of moderation in Tuesday’s data, traders ramped up bets that the U.S. central bank will accelerate its monetary tightening measures this year.

Also weighing on the euro was Russian President Vladimir Putin’s description of on-and-off negotiations to end the war in Ukraine as “a dead-end situation” on Tuesday.

In addition, German lawmakers called for an embargo on Russian oil as soon as possible, which if implemented would further weigh on the region’s growth prospects.

“The dollar will continue to do well versus the low yielders such as the euro and the yen,” said Kenneth Broux, an FX strategist at Societe Generale in London.

“In contrast to German bond yields, the pre-ECB bounce in the euro isn’t happening,” Broux said referring to the European Central Bank’s meeting on Thursday.

Against a basket of six major currencies, the dollar edged 0.1% up to 100.52, its highest levels since April 2020. It has gained nearly 3% so far this month and is on track for its biggest monthly rise in nine months.

The yen led losers against the dollar with the Japanese unit weakening 0.5% to cross the 126 yen to the dollar level for the first time since May 2002.

Elsewhere, the kiwi was buffeted after the Reserve Bank of New Zealand announced its sharpest rate hike in two decades to curb inflation.

While the 50 basis point rise by was larger than many economists had expected, it was within traders’ expectations, and policymakers tempered the move by not lifting their projected peak for rates.

The euro fell to $1.0821 overnight, its lowest level against the dollar in more than a month and hovered nearby at $1.0826 in early London trading.

The Australian dollar and the offshore Chinese yuan weakened slightly after a surprise plunge in China’s imports added to investor worries about weakening demand.

The dollar index was back above 100 on Tuesday morning, supported by high U.S. yields ahead of inflation data that is expected to show U.S. prices gained the most in over 16 years, reinforcing expectations of aggressive Fed tightening policy.

The index stood at 100.11, testing last week’s near two-year high of 100.19.

The dollar’s gains have been most striking against the yen, and it was trading choppily at 125.47 yen on Tuesday morning, just off the overnight intraday high of 125.77, when it neared its June 2015 peak of 125.86. A move past that level would take the dollar to its highest against the yen since 2002.

Japanese Finance Minister Shunichi Suzuki on Tuesday declined to comment on specific prices in foreign exchange markets, but said excess volatility and disorderly movements could have an adverse effect on the economy and financial stability.

The dollar also gained steadily overnight on the offshore Chinese yuan, and reached a two-week high of 6.390 in early trade.

The dollar’s strength “was most apparent against JPY and CNH – currencies of economies with a dovish central bank,” said analysts at CBA in a morning note.

The Bank of Japan has repeatedly intervened to keep benchmark bond yields around zero.

CBA analysts said they expected very high U.S. inflation would reinforce expectations of aggressive Federal Reserve tightening. They said that because a 50 basis point rate hike was not yet fully priced in for each of the next two Fed meetings, they expect further gains for the dollar.

“We expect the dollar to stay bid and lift to the pandemic high of 103 pts in coming months.”

U.S. consumer prices likely increased by the most in 16-1/2 years in March, according to a Reuters poll of economists as the war in Ukraine boosted the cost of gasoline to record highs.

Meanwhile U.S. longer term yields continued their march higher.

The yield on benchmark 10 year notes rose to 2.836%, its highest since December 2018. If Tuesday’s early advance holds it would be the eighth straight session of gains for benchmark yields.

The yield on the 30-year Treasury bond rose to 2.86%, its highest since May 2019.

Elsewhere, the euro was unable to hold onto gains from its mini-relief rally on Monday after French leader Emmanuel Macron beat far-right challenger Marine Le Pen in the first round of presidential voting.

It was last at $1.087 little changed from its Friday close.

“The bottom line, then, is that we are where we were before yesterday’s vote,” said Rabobank analysts.

“Macron looks set to return to office following the April 24 vote but the scale of his victory is likely to be far smaller than when he was seen as an upstart five years ago and likely slim enough that the political earthquake that would be a Le Pen victory cannot be entirely discounted.”

The Australian dollar was on the back foot at $0.7403, as lower oil prices weighed on the commodity-linked currency. The New Zealand dollar was also lower at $0.6807, ahead of a closely watched meeting by the Reserve Bank of New Zealand at which a 50 basis point rate hike is on the cards.

Sterling inched lower to $1.30155.

The dollar surged to a nearly two-year high on Wednesday after minutes of the last Federal Reserve meeting reinforced expectations of multiple half percentage-point rate increases to control soaring inflation.

The dollar index, which measures the greenback’s value against six major currencies, climbed to 99.7780 , its strongest level since late May 2020. It was last up 0.2% at 99.70.

Fed officials viewed the hefty rate increases as appropriate at future meetings, especially if inflation pressures intensify, minutes showed. They would also have preferred a 50 basic point rise in the target range for the federal funds rate at the March meeting.

“There’s a realization that some of the doves have come over to the 50 basis point hike territory and that is likely what we’re going to see at the next several meetings going forward as inflationary pressures remain elevated,” said Ryan Detrick, chief market strategist at LPL Financial in Charlotte, North Carolina.

“The Ukraine conflict uncertainty likely prevented a 50 basis point hike last month, so it could put a little cold water on extremely hawkish policy. But still, we know multiple hikes are coming very soon,” he added.

Fed officials also agreed to reduce the balance sheet by $95 million per month – $60 billion of its Treasury holdings and $35 billion of mortgage-backed securities – over three months, according to the minutes of the March meeting.

Analysts at Action Economics said the $95 billion balance sheet run-off was close to expectations of $100 billion per month.

The U.S. currency also hit the nearly two-year milestone on Tuesday after Fed Governor Lael Brainard, usually a more dovish policymaker, said she expected a combination of rate increases and a rapid balance sheet runoff to bring U.S. monetary policy to a “more neutral position” later this year. Further tightening would follow as needed, she added.

Analysts said the Fed minutes were less hawkish than Brainard’s comments.

The dollar held gains against the yen, which tracks U.S. two-year yields reflecting Fed policy expectations, traded slightly higher at 123.78.

The Australian dollar jumped to a nine-month high on Tuesday after the country’s central bank signaled higher interest rates were closer, while the euro languished near a one-week low amid talk of more sanctions against Russia.

The Aussie was up 1.15% at $0.7629, its strongest since late June, after the Reserve Bank of Australia dropped its pledge to be “patient” on tightening policy, while holding the key rate at a record low for now, as was widely expected.

“The RBA dropped its ‘patience’ narrative from the forward guidance for hiking, so what it means is the RBA is going to hike some time in the next few months,” most likely in June, said Joseph Capurso, a strategist at Commonwealth Bank of Australia.

“Aussie is comfortably going through that 75.40-cent resistance level, so we think it’s going to head closer toward 77 cents over the next few months,” although it may pause at 76 cents for now, he said.

The euro was little changed at $1.0972 after dropping as low as $1.0960 in the previous session for the first time since March 28. It had reached a one-month high of $1.1185 just days earlier amid increased optimism for an end to the Ukraine conflict.

The United States and European countries pledged on Monday to punish Moscow over civilian killings in northern Ukraine, where a mass grave and tied bodies of people shot at close range were found in a town seized back from Russian forces.

New sanctions could include restrictions on the billions of dollars in energy that Europe still imports from Russia. The Kremlin denied accusations related to the murder of civilians.

The euro’s woes boosted the dollar index, which held near a one-week high of 99.083 reached overnight. It last stood at 98.93.

Gold eased on Friday and was headed for a weekly fall, as higher Treasury yields dented the appeal of zero-yield bullion, with a stronger dollar adding further pressure.

Spot gold was down 0.2% at $1,934.01 per ounce. U.S. gold futures fell 0.8% to $1,937.90.

“It is in particular the developments in the fixed income markets with yields rising again,” that are pressuring gold, said Quantitative Commodity Research analyst Peter Fertig.

Yields on the benchmark U.S. 10-year Treasury note rose back above 2.4% on Friday after dropping to a one-week low in the previous session. Higher yields increase the opportunity cost of holding gold, which yields nothing.

The U.S. dollar firmed for a second straight session, making greenback-priced gold less appealing.

Gold is on course to end the week about 1.4% lower, having dropped earlier this week on signs of progress in talks between Russia and Ukraine. Negotiations aimed at ending the five-week war were set to resume even as Ukraine braced for further attacks in the south and east.

A key U.S. jobs report that could help the Federal Reserve decide whether to order an interest rate hike of up to 50 basis-points next month is due later on Friday.

“A downside surprise on employment and earnings should not dent market rate hike pricing for 2022, with the Fed shifting to inflation-fighting mode,” said Stephen Innes, managing partner at SPI Asset Management in a note.

“By contrast, a beat on jobs data would add weight to the idea that the U.S. economy has more underlying momentum than the Fed previously assumed.”