Gertrude Chavez-Dreyfus
NEW YORK (Reuters) – The dollar rose to a new 34-year high against the yen on Friday, helped in part by U.S. inflation data that showed no signs of weakening, in line with forecasts and supporting expectations that the Federal Reserve , most likely, to postpone the reduction in interest rates until the end of this year.
The dollar’s peak against the yen came as the Bank of Japan kept interest rates steady at the end of its two-day policy meeting, although it warned of future rate hikes. With the yen at a multi-decade low, market participants were braced for possible Japanese intervention to support its currency.
The dollar hit 157.795 yen, its highest level since June 1990, and was last up 1.3% at 157.71. The US dollar briefly fell to 154.97 earlier in the session, sparking speculation that the Bank of Japan, acting on behalf of the Treasury, may have been reviewing exchange rates, believed to be a sign the central bank was preparing to intervene.
It was not immediately clear what prompted the move.
The US dollar was on track for a 2% weekly gain against the Japanese currency, its biggest gain since mid-January.
In the US, the focus was on inflation.
The price index for personal consumption expenditures (PCE) rose 0.3% in March, compared with forecasts for a 0.3% increase, data showed. In the 12 months to March, PCE inflation rose 2.7% against expectations of 2.6%.
The PCE price index is one of the inflation indicators the Fed tracks to achieve its 2% target. Monthly inflation rates of 0.2% over time are needed to bring inflation back to target.
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“While Friday’s result was less than whisper-hot, the stark reality is that near-term trends in the Fed’s favored inflation gauge have been moving steadily lower since the start of 2024,” wrote Douglas Porter, the Fed’s chief economist. BMO.
Porter added that the 0.32% monthly rise brought a slight sigh of relief in the market, but noted that the figure would match the fastest monthly growth in the decade before the pandemic.
“This is unlikely to give the Fed ‘confidence’ that inflation is calming,” Porter wrote.
U.S. interest rate futures, after accounting for inflation, estimate a 58% chance of a Fed rate cut at the September meeting, up from 68% a week ago, according to FedWatch CME. The Fed’s easing in December is estimated at more than 80%.
In the afternoon, quotes rose 0.3% to 105.93.
The euro fell 0.2% to $1.0705. It rose 0.4% for the week, the biggest weekly gain since early March.
Against the yen, the euro hit a new 16-year high of 168.85 yen. It last traded at 168.845, up 1.1%.
On a weekly basis, the single European currency rose 2.5% against the yen, its best performance since mid-June 2023.
Sterling fell 0.1% to $1.2501. It rose 1.1% against the dollar over the week, its biggest gain since early March.
In Japan, the Bank of Japan on Friday kept its short-term interest rate target at 0-0.1% and made small upward adjustments to its inflation forecast. Investors did not expect the policy change, but took the decision as confirmation that only small steps lay ahead.
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Bank of Japan Governor Kazuo Ueda said at a news conference after the rate decision that monetary policy does not directly target exchange rates, but exchange rate volatility can have a significant impact on the economy and prices.
“If the yen’s movement has an impact on the economy and prices that is difficult to ignore, it could be a reason for policy adjustment,” Ueda said.
Currency investors are now focused on next week’s Federal Open Market Committee (FOMC) meeting, during which the US central bank is expected to keep interest rates steady.
The market is bullish on the Fed’s hawkish stance at the meeting and a stronger dollar given a string of better-than-expected economic data.
Brian Dangerfield, head of G10 U.S. currency strategy at NatWest, wrote in a research note that the bank believes Fed Chairman Jerome Powell is not ruling out rate hikes, a prerequisite for data-driven policy. However, rate hikes are not the FOMC’s base case, Dangerfield added.