Original article authored by Investing.com, published on Mitrade.
Title: Dollar Rises Amid Growing Confidence in Fed’s Hawkish Stance, Yen Weakens Ahead of Key US Data
The US dollar continued to strengthen on Wednesday, bolstered by rising Treasury yields and mounting expectations that the Federal Reserve may maintain its hawkish stance for an extended period. The Japanese yen, in contrast, weakened further as markets sensed no imminent intervention from Japanese authorities, even as the currency tested levels that previously triggered action.
Here’s a detailed look at the key developments that shaped the currency markets.
US Dollar Continues Climb as Yields Surge
– The US dollar index, which measures the greenback against a basket of six major currencies, hit new 10-month highs, touching 106.80.
– This surge followed a rally in the 10-year US Treasury yield, which reached 4.64 percent, its highest level since 2007.
– The 2-year yield also hovered at multi-year highs above 5.1 percent, signaling a growing belief that the Federal Reserve may hold interest rates higher for longer.
– The upward push in yields and the dollar came as investors digested comments from several Federal Reserve officials, including Minneapolis Fed President Neel Kashkari, who did not rule out further rate hikes if economic data remains robust.
– Elevated inflation data, strong consumer spending, and resilient labor market figures have kept alive expectations that monetary policy tightening may not yet be over.
Fed Remains Cautiously Hawkish
– The Fed’s monetary policy strategy appears to be shifting from an aggressive rate-hike campaign to a wait-and-see approach. However, the central bank has not ruled out additional increases.
– Federal Open Market Committee (FOMC) projections last week signaled the possibility of one more rate hike before the end of the year.
– Fed funds futures markets currently assign little chance of a rate increase at the November meeting but still see a roughly 40 percent probability that the Fed may raise rates one more time in December.
– Many Fed officials have emphasized the importance of upcoming data, particularly inflation and labor market metrics, in determining their next moves.
Japanese Yen Faces Continued Pressure
– The Japanese yen fell to 149.03 per dollar on Wednesday, hovering near the psychologically important 150 level. This marks its lowest point since October 2022.
– Market participants had speculated that Japanese authorities might intervene if the dollar climbs above 150 yen, which was the level that triggered a rare intervention from the Bank of Japan almost exactly a year ago.
– However, there has been no clear indication of action so far. Japan’s Finance Minister Shunichi Suzuki repeated a fairly routine message, saying that the government is closely monitoring currency moves and would respond appropriately if volatility becomes excessive.
– Given the lack of a sharp yen recovery or any forceful response, traders appear increasingly confident that intervention may not occur unless there is a rapid and disorderly plunge.
Bank of Japan to Hold Policy Meeting
– Adding to the pressure is the prospect of another dovish stance by the Bank of Japan at its upcoming meeting.
– The central bank continues to maintain its ultra-loose monetary policy, including negative interest rates and yield curve control. This approach isolates Japan from other global central banks that have moved aggressively to tighten financial conditions.
– Some hope for incremental policy normalization, but near-term change still seems unlikely given Japan’s relatively low inflation compared to Western economies.
– Even with mild wage growth and recent upticks in inflation, core trends remain subdued. This makes any significant tightening by the BoJ premature, which in turn widens the monetary policy gap between Japan and the US.
Euro and Sterling Struggle Against a Strong Dollar
– The euro weakened further against the dollar, slipping below $1.05 to reach 1.0498, its lowest point since December 2022.
– ECB policymakers have recently softened their tone, signaling that interest rates may have peaked in the eurozone.
Read more on EUR/USD trading.