Ankur Banerjee
SINGAPORE (Reuters) – The dollar strengthened on Thursday after better-than-expected U.S. inflation data dashed long-held expectations that the Federal Reserve would begin a round of rate cuts in June, while the yen weakened at levels last seen observed once in mid-1990.
Investors’ attention will now focus on US producer price data and the European Central Bank meeting later in the day.
The yen’s fall to a 34-year low of 153.24 per US dollar on Wednesday revived fears of intervention as Tokyo authorities confirmed they were not ruling out any steps to combat excessive swings.
Japan intervened in the foreign exchange market three times in 2022, when the yen fell to a 32-year low of 152 per dollar.
On Thursday, the yen strengthened 0.17% to 152.93 per dollar. That was slightly below the 153.24 level hit on Wednesday after data showed the U.S. consumer price index rose 0.4% month-on-month in March, versus the 0.3% rise expected by economists polled by Reuters. .
The yen has fallen nearly 8% against the dollar this year, with the currency strengthening around 151 per dollar since the Bank of Japan ended eight years of negative interest rates last month.
Low Japanese rates have made the yen the funding currency of choice for carry trades over the years, where traders typically borrow a low-yielding currency to then sell and invest the proceeds in assets denominated in a higher-yielding currency.
Kyle Rodda, senior financial market analyst at Capital.com, expects Tokyo authorities will continue to talk tough and intervene if things get messy.
“The very interesting element is how the BOJ ultimately handles this situation… From here we may see more aggressiveness and that will be the catalyst for a more sustained improvement in the situation,” Rodda said.
Bank of Japan Governor Kazuo Ueda said on Wednesday the central bank would not react directly to currency changes when setting monetary policy, rejecting market speculation that a sharp fall in the yen could force it to raise interest rates.
Fed rates will decrease
After the inflation data, traders sharply cut their bets on interest rates falling this year, as well as on when the Federal Reserve will begin its easing cycle.
Adding to those doubts, minutes from the Fed’s March meeting released Wednesday show policymakers were already disappointed with recent inflation figures even before the latest report.
Markets are now pricing in an 18% chance of a Fed rate cut in June, up from 50% before the CPI data, according to CME’s FedWatch tool, with September set to be the next starting point for rate cuts.
Traders are also estimating 43 basis points of easing this year, much lower than the 75 basis points of easing projected by the US central bank. At the beginning of the year, traders predicted a contraction of more than 150 bps. in 2024.
“Two rate cuts in 2024 now look more likely as the Fed will want more confidence that inflation is trending sustainably towards its target,” said Nicholas Chia, Asia macro strategist at Standard Chartered (OTC:).
“While the Fed is not dependent on specific data, the totality of the data clearly indicates that there is no need to rush into cuts.”
A hot inflation report sent the U.S. Treasury surging and the 0 index, which measures the dollar against six peers, rose more than 1% on Wednesday to near a five-month peak of 105.30. The index was last at 105.15 on Thursday.
Bond yields fell 2.4 basis points to 4.536% on Thursday, hovering near the five-month peak of 4.568% they hit on Wednesday.
The dollar’s rise pushed it to a five-month low despite the central bank’s efforts to boost it. [CNY/]
The euro last bought $1.07465, falling 1% on Wednesday ahead of the European Central Bank’s decision. The ECB is expected to remain unchanged on rates but is likely to signal that rate cuts could come as early as June.
Sterling last traded at $1.2548, up 0.07% on the day. The Australian dollar rose 0.14% to $0.6522 and the New Zealand dollar rose 0.17% to $0.59835.