After the Bank of Japan indicated that a sudden policy change last week did not herald the beginning of a wider withdrawal of monetary support, the yen also came under pressure.
The dollar rose to 134.40 in Asian trading, the highest level since Dec. 20, when the BOJ unexpectedly loosened the 10-year Japanese government bond yield policy range, sending the pair lower.
The yen experienced its largest one-day gain against the dollar in 24 years on that day, closing 3.8% higher overall as speculators made predictions about the ultimate tapering down of stimulus.
According to Osamu Takashima, head of G10 FX strategy at Citigroup Global Markets Japan, “it basically confirmed that the BOJ surprise from last week was a one-off, but from a longer-term viewpoint nobody believes it.” Takashima predicts that the dollar-yen will break through 130 in the second half of 2019.
But in the short run, the dollar-yen is recovering, he added. “The market is now anticipating a significant revival in the Chinese economy,” he continued, adding that these expectations have sharply increased bond yields and supported the dollar-yen.
The 10-year Treasury yield, which frequently correlates strongly with the dollar-yen exchange rate, was at 3.8316%, down 3 basis points from the previous day’s six-week high of 3.862%.
The swift deconstruction by China of its draconian zero-COVID regulations, which have severely crippled its economy for almost three years, is throwing a wrench in the works for markets in the closing weeks of the year.
Yen rising bond yields
Investors must balance the impact of an increase in infections on the recovery. With the uptick in economic activity as China’s consumers and businesses resume some semblance of normalcy.
According to David Cottle, an analyst at DailyFX, “it’s little wonder that China’s COVID response should top many analysts’ lists of concerns about 2023. With infection numbers rising at many thousands per day.”
The dollar index, which compares the value of the dollar to six important currencies, increased by 0.1% to 104.31. Two weeks ago, when the Federal Reserve halted interest rate increases to a half-point pace, it fell to 103.44, its lowest position in six months.
However, since then, Fed officials, including Chair Jerome Powell, have emphasized that the tightening of policy will be protracted and will have a higher terminal rate, feeding concerns about a downturn in the United States. Branch manager at State Street in Tokyo, Bart Wakabayashi, stated, “The dollar is in a really fascinating scenario.”
“The Fed will have to decrease rates if there is a recession in the United States. And certainly you will want to sell the dollar,” he said. “In the event of a global recession, individuals will purchase the dollar as a safe haven. The dollar is therefore in a bit of a pickle. And you need to be very careful about the currency you purchase or sell against.”
The euro was unchanged at $1.0637 after steadily trading near six-month highs. For the previous few weeks after Christine Lagarde. President of the European Central Bank, emphasized that rate hikes would need to continue.
Sterling maintained steady at $1.2028 versus the dollar and at 88.45 pence against the euro. The New Zealand dollar increased by 0.41% to $0.6299, while the Australian dollar increased by 0.4% to 0.07% to $0.6758.