Ankur Banerjee
SINGAPORE (Reuters) – The dollar remained broadly stable on Wednesday, keeping the yen near 34-year lows after comments from Federal Reserve officials including Chairman Jerome Powell suggested U.S. interest rates were likely to remain high for a long time time.
Senior U.S. central bank officials, including Powell, on Tuesday refused to give any guidance on when interest rates might be cut, saying instead that monetary policy should remain contractionary for a long time, dashing investors’ hopes for a significant easing this year.
The comments follow a slew of data in recent weeks that have highlighted the strength of the U.S. economy along with persistent inflation.
“Right now, given the strength of the labor market and progress in inflation, it is appropriate to give contractionary policies more time to work and let the data and changing outlook guide us,” Powell said at the forum in Washington.
The dollar remained broadly stable, with the euro at $1.0621 on Wednesday, not far from the five-and-a-half-month low of $1.06013 it hit on Tuesday.
Against a basket of currencies, the dollar last traded at 106.32, just shy of Tuesday’s five-month peak of 106.51. Over the year, the index grew by 5%.
Powell’s comments further dashed any lingering expectations of a Fed rate cut in the near future, as markets price September as the new starting point of the easing cycle, pushing it back from June.
Traders now expect a 40 basis point rate cut in 2024, significantly lower than the 160 basis point easing they expected at the start of the year.
“Powell and other Fed officials have taken the view that rate cuts have been delayed rather than cancelled, which continues to reassure investors,” said Ben Bennett, Asia-Pacific investment strategist at Legal And General Investment Management.
“If they start offering further rate hikes, then we could see a repeat of last October’s fluctuations. “I’m watching dollar strength and US real yields very closely.”
JENA IS WORRIED
A revival of the theory that U.S. interest rates will be higher for longer has helped lift yields, with the yield on the 10-year Treasury note rising to a five-month high of 4.696% on Tuesday. They were last at 4.661% on Wednesday. [US/]
The yen, which is extremely sensitive to U.S. bond yields, is stuck at levels last seen in 1990, with the currency inching closer to 155 to the dollar, which traders fear could lead to intervention by Japanese authorities.
On Wednesday, the yen last traded at 154.63 per dollar, having touched a 34-year low of 154.79 in the previous session. The Japanese currency has fallen about 9% against the dollar this year.
“I think the dollar/yen pair will break above 155 pretty soon,” said Kieran Williams, head of Asia FX at InTouch Capital Markets.
“While the chorus of Japanese officials verbally interfering with the yen increased as the dollar/yen rose following last week’s US Consumer Price Index, officials’ rhetoric was more focused on the speed of movement rather than the levels themselves.”
Japan last intervened in the foreign exchange market in 2022, spending an estimated $60 billion to defend the yen.
InTouch Capital’s Williams said that in the current environment, it would likely take significantly more to have a lasting effect as US two-year yields rose about 36 bps. from the beginning of April.
The dollar’s strength has cast a shadow over the foreign exchange market, with emerging markets in Asia struggling to stem the decline of their currencies and the prospect of a rate cut this year in the region quickly evaporating. [EMRG/FRX]
Bank of Korea Governor Ri Chang-yong said the central bank is ready to take measures to calm the market while Indonesia’s central bank continues to intervene in the foreign exchange market ahead of its policy meeting next week.
In other major currencies, sterling last traded at $1.2425 but remained close to the five-month low of $1.24055 it hit on Tuesday.
The Australian dollar was up 0.16% at $0.6410 on the day and the New Zealand dollar was up 0.37% at $0.5902, both off five-month lows hit on Tuesday. [AUD/]
Data showed New Zealand consumer prices rose in line with forecasts in the first quarter, but domestic inflation remained surprisingly high, prompting markets to delay the expected start of interest rate cuts.