The U.S. dollar skyrocketed to its highest level in over a week versus the Japanese yen today. A surge in Treasury yields supported the currency while pushing the Yen lower. Investors have also expected a recovery in Chinese economic growth as the country loosened its coronavirus restrictions.
The greenback jumped by as much as 0.67%, exchanging hands at 134.40 in Asian trading. This is its highest point since December 20. The Bank of Japan caused the USD/JPY pair to tumble lower with a surprise loosening of the 10-year Japanese government bond yield policy band.
That day, the Yen enjoyed its biggest one-day surge against the greenback in 24 years, gaining 3.8% on the day. Investors hoped for an eventual tightening of stimulus. However, on Wednesday, the Bank of Japan hinted that a surprise policy shift last week did not mean that it would start a broader withdrawal of monetary stimulus. This news weighed on the Japanese Yen.
It seems policymakers support the country’s ultra-accommodative policy, even though they contemplated prospects for economic growth. Osamu Takashima, the head of G10 FX strategy at Citigroup Global Markets Japan, noted that the Bank of Japan’s surprise from last week was a one-off case. From a longer-term viewpoint, analysts don’t believe it. Takashima thinks the dollar-yen pair will fall through 130 in the second half of 2023.
However, he also added that the pair is rebounding in the near term. The forex market anticipates solid growth in the Chinese economy. Such sentiment has bolstered bond yields, strengthening the USD/JPY. The 10-year Treasury yield sat at 3.8316% after hitting a six-week peak of 3.862% the previous day.
How is the U.S. dollar trading now?
The dollar index climbed up by 0.1% to 104.31 against the basket of six major currencies. However, it plunged to a six-month low of 103.44 two weeks ago when the Fed decided to slow its aggressive interest rate hikes to a half-point pace. Since then, Fed officials and Chair Jerome Powell have stated that they would continue policy tightening. That caused investors to worry about a U.S. economic slowdown.
Bart Wakabayashi, the branch manager at State Street in Tokyo, noted that the greenback is currently in a very interesting situation. If the U.S. economy begins declining, the Federal Reserve will have to cut rates, and traders will want to sell the USD. But if the global recession starts at the same time, people will buy the greenback as a safe-haven currency. So, investors should be careful what currency they are buying or selling against the USD.
Meanwhile, the euro traded flat at $1.0637 on Wednesday. The currency remained near its six-month peak for the past couple of weeks. European Central Bank President Christine Lagarde announced that the ECB needed to continue rate hikes.
The British Pound exchanged hands at $1.2028 versus the dollar. It was also firm against the common currency at 88.45 pence. Moreover, the Australian dollar jumped by 0.4% to $0.6758. The New Zealand dollar rallied by 0.41% to $0.6299, as well.
What about the EM currencies?
In Asia, Hong Kong stocks surged to four-month highs today. The city declared that it would lessen most of its strict coronavirus curbs. However, the mood across EM Forex markets were subdued due to higher Treasury yields, as well as concerns over a ban on Russian oil exports.
There are only two trading sessions left until the end of this year. After a turbulent twelve months, investors from developing economies are wary. On Wednesday, the MSCI’s EM equities index remained flat after Wall Street traded in the red overnight.
The Hang Seng index ended the session higher by 1.6%, though, after skyrocketing by as much as 2.6% to a four-month peak earlier in the session. According to Hong Kong leader John Lee, the government will cancel all the coronavirus measures on Thursday.
On Tuesday, most Asian stocks and currencies soared thanks to China’s news. Despite that, the country’s main equity indexes ended the session a bit lower on Wednesday. The yuan also declined.
Furthermore, the rouble plummeted by 0.3% in Russia. Overall, the currency shaved off 12% in December, as western sanctions on Russian oil weighed on it. The Polish zloty, the Hungarian forint, and the South African rand also decreased between 0.3% and 0.7%.