Title: US Dollar Retreats as Treasury Yields Dip; Yen Stabilizes with Intervention Concerns
Original Article By: Reuters (via Mitrade)
The US dollar experienced a broad decline on Friday, October 27, 2023, as US Treasury yields eased following disappointing economic data. The move cast doubt on the strength of the US economy, prompting investors to reassess the likelihood of continued Federal Reserve rate hikes. Meanwhile, the Japanese yen found support amid growing speculation that Japanese authorities may intervene to prevent further depreciation.
Here is a detailed breakdown of the market developments, economic indicators, and currency dynamics that unfolded:
US Dollar Weakens as Treasury Yields Fall
The US dollar retreated from recent highs as yields on US Treasury bonds declined. A drop in yields typically reduces the attractiveness of dollar-denominated assets, weakening demand for the greenback. This came after the release of weaker economic data, particularly concerning US durable goods orders and underlying inflation indicators.
Key factors affecting the dollar:
– Treasury yields: US 10-year yields fell to around 4.83 percent, after reaching over 5 percent earlier in the week.
– Data misses: Core PCE inflation numbers and durable goods orders missed forecasts, adding to concerns that economic momentum may be slowing.
– Market repositioning: Investors viewed the data as a signal that the Federal Reserve might pause or reconsider further rate hikes.
The dollar index, which measures the greenback against six major peers, declined to 106.48, losing roughly 0.3 percent on the day. Despite the drop, it remained near its highest levels for the year as investors continue to weigh safe-haven flows amid geopolitical tensions, especially in the Middle East.
Yen Strengthens on Suspected BOJ Intervention
The Japanese yen stabilized near the 150 barrier against the US dollar, supported by growing talk that the Bank of Japan (BOJ) or Japan’s Ministry of Finance may intervene to prevent a sharp depreciation of the currency. Thin liquidity conditions and investor uncertainty around BOJ actions added to market caution and limited further dollar strength.
Key highlights:
– The USD/JPY pair traded near 150.20 after briefly touching a high of 150.78 on Thursday.
– Market participants remained wary of a repeat of past interventions, such as those observed in late 2022.
– Japan’s Finance Minister Shunichi Suzuki and other officials have repeatedly stated that they are closely watching FX markets and are prepared to act if necessary.
While intervention has not been formally confirmed, currency traders and analysts closely monitor fluctuations in USD/JPY near round-number psychological levels, such as 150, as previous BOJ interventions occurred around similar thresholds.
Weak US Economic Data Jolts Outlook
Two critical data releases on Friday contributed to the dollar’s decline and reshaping of monetary policy expectations:
1. Durable Goods Orders:
– Orders for long-lasting US manufactured goods, such as aircraft, dropped more than expected in September.
– The report showed a headline decline of 4.7 percent, worse than the estimated decline of around 4.0 percent.
– The negative figure suggests softer business investment and could weigh on future production in the US manufacturing sector.
2. Core PCE Price Index:
– The Federal Reserve’s preferred inflation gauge rose by 0.3 percent in September, aligning with expectations.
– On a year-over-year basis, the index increased by 3.7 percent, signaling a gradual cooling but still above the central bank’s target of 2 percent.
– The data suggests inflationary pressures persist but may not be strong enough to warrant more aggressive Fed tightening.
Market Implications:
– Odds of a November Fed rate hike fell sharply in the wake of the data.
– Fed funds futures markets now price in only a 20 percent chance of an additional hike in 2023.
– Investors are increasingly expecting rate cuts by the second half of 2024 if economic activity continues to slow.
Analysts’ Take on the
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