In the face of expectations for a robust recovery in Chinese GDP as COVID-19 limits ease, the dollar rose to a more than one-week high against the yen on Wednesday. This was aided by rising Treasury rates.
The Bank of Japan continued to send out indications that the unexpected policy change it made last week was not the beginning of the end for stimulus, which put pressure on the yen.
In Asian trade, the dollar gained 0.5% to 134.17 yen after earlier touching 134.40 for the first time since December 20, when the BOJ unexpectedly loosened the 10-year Japanese government bond rate policy range, sending the pair down.
For the first time since early August, the dollar fell to as low as 130.58 yen on that day as speculators made predictions about a potential removal of stimulus.
Even as they acknowledged the rising likelihood that the country will see stronger wage growth and persistent inflation next year, officials supported maintaining their ultra-accommodative approach, according to a summary of the meeting’s discussions that was published on Wednesday.
According to Osamu Takashima, head of G10 FX strategy at Citigroup Global Markets Japan, “it basically confirmed that the BOJ surprise from last week was a one-off, but from a longer-term viewpoint nobody believes it.” Takashima predicts that the dollar-yen will break through 130 in the second half of 2023.
Hopes For A Market Revival?
But in the short run, the dollar-yen is recovering, he added. “The market is now anticipating a substantial revival in the Chinese economy,” he continued, adding that these expectations have sharply increased bond rates and supported the dollar-yen.
In Tokyo, the 10-year Treasury yield, which sometimes exhibits strong association with the dollar-yen exchange rate, was at 3.8506%, not far from the overnight high of 3.862%.
In comparison to the euro, which increased by 0.51% to 142.70 yen and reached a one-week high, the yen was lower in Japan. To reach another one-week high of 90.40 yen, the Australian dollar increased by 0.62%.
The dollar index, which compares the value of the dollar to the yen and the euro along with six other currencies, increased 0.1% to 104.31 on Monday, continuing its upward trend after falling to its lowest point since mid-June at 103.44 on December 14—the day the Federal Reserve slowed interest rate increases to a half-point pace.
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Will Rates Come Down In 2023?
However, since then, Fed officials, notably Chair Jerome Powell, have emphasized that the tightening of policy would be protracted and will have a higher terminal rate, feeding concerns about a downturn in the United States.
Branch manager at State Street in Tokyo, Bart Wakabayashi, stated, “The greenback is in a really fascinating scenario.”
“The Fed will have to decrease rates if there is a recession in the United States, and certainly you will want to sell the dollar,” he added. “In the event of a worldwide recession, individuals will purchase the dollar as a safe haven. The dollar is thus in a bit of a pickle, and you need to be very careful about the currency you purchase or sell against.”
As of Dec. 15, when European Central Bank President Christine Lagarde emphasized that rate rises would need to continue, the euro was unchanged at $1.0636, moving sideways over the previous two weeks.
Sterling dropped by 0.15% to $1.2013, remaining slightly above its monthly low of $1.1993, which was set on December 22. As it moved toward the top of its trading range since December 16, the Australian dollar increased 0.07% to $0.6738.
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