USA Dollar

Yen close to intervention levels, dollar gains before Fed

By Herbert Lash and Stefano Rebaudo

NEW YORK (Reuters) -The yen hit a fresh multi-month low versus the dollar on Wednesday hours before the Federal Reserve concludes a two-day policy meeting after the Bank of Japan (BOJ) the day before raised interest rates for the first time in 17 years.

Analysts said the yield differential between U.S. Treasuries and Japanese government bonds remains wide and will keep pressure on the yen as it nears a multi-decade low of 151.94 hit in October 2022. The dollar rose to 151.92 last November.

But the major central banks are largely moving in lockstep as they plan to cut interest rates to spur growth as economies slow and inflation keeps decelerating.

“Nobody’s expecting the BOJ to embark on a prolonged hiking cycle,” said Bipan Rai, North America head of FX strategy at CIBC Capital Markets in Toronto. “You’re still going to end up in a scenario where the rate differentials between the United States and Japan are going to look fairly wide.”

The dollar was last up 0.6% against the yen at 151.79.

A potentially hawkish meeting of the Fed Open Market Committee poses downside risks to the yen, which could trigger a fresh round of measures from Japanese authorities to support it.

While investors expect the U.S. central bank to keep rates unchanged at its policy announcement at 2 p.m. ET (1800 GMT), the statement and comments by Fed Chair Jerome Powell could be more hawkish about the timing and extent of future easing.

“If the yen falls further from the current levels, I expect some verbal intervention from Japanese authorities to support the currency,” said Athanasios Vamvakidis, global head of forex research at BofA.

The yen weakened and Japanese government bond yields fell after the BOJ announced on Tuesday that there would be an exit from years of ultra-easy monetary policies.

“The BOJ decided for a dovish exit from its negative rates policy. They raised rates but for now they are staying there. Meanwhile they will continue buying the same amount of bonds,” BofA’s Vamvakidis said.

The yen’s drop was broad-based, with the currency weakening to 164.71 against the euro, its lowest since 2008, while against the pound, yen slipped to 192.84, its lowest since 2015.

Low Japanese rates have made the yen the funding currency of choice for carry trades, in which traders typically borrow a low-yielding currency to then sell and invest the proceeds in assets denominated in a higher-yielding one.

The dollar index, a measure of the U.S. currency against six others, rose 0.25% to 104.100.

Recent stronger-than-expected U.S. inflation reports have led traders to further reduce bets on Fed rate cuts this year, with markets now pricing in 74 basis points (bps) of easing by year end, or about half expectations at the start of 2024.

The euro was down 0.25% at $1.0838 as investors positioned ahead of the Fed meeting. European Central Bank President Christine Lagarde said on Wednesday the ECB will continue to be data dependent and will not commit to a pre-set number of rate cuts even after it starts easing its monetary policy.

The Aussie eased 0.19% to $0.6518, a day after Australia’s central bank held interest rates steady as expected.

In cryptocurrencies, bitcoin last rose 2.71% to $63,572.00.

(Reporting by Herbert Lash, additional reporting by Stefano Rebaudo, additional reporting by Ankur Banerjee; Editing by Bernadette Baum and Nick Zieminski)

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