The dollar is skyrocketing towards a new high. What about Yen?
The safe-haven U.S. dollar rallied on Monday, rising towards new two-decade highs against major rival currencies. Fears of a global economic slowdown supported the currency, along with bets on steep interest rate increases by the U.S. Federal Reserve.
On the other hand, the Japanese yen was among a host of currencies that declined on the day. It plunged to its lowest level against the greenback since 1998. The gap between Japanese and U.S. benchmark yields widened after the new data revealed the red-hot U.S. inflation on Friday. Moreover, a sell-off across forex markets saw European stocks tumble for a fifth consecutive session.
The dollar index added as much as 0.6% versus Friday’s close to 104.84 against six major currencies, trading close to the two-decade high of 105.01 hit in May. It exchanged hands at 104.75 at last. It seems that central banks’ efforts to hinder runaway inflation will remain in focus this week. Traders expect the Bank of England and Federal Reserve to raise interest rates at their meetings. There is also a chance the Swiss National Bank will do the same.
Meanwhile, the Bank of Japan (BoJ) continues resisting pressure to tighten policy. That causes the decline of the country’s currency. The policy divergence has already sent the Yen down more than 15% against the greenback since early March. On Monday, Japan’s top government spokesperson announced that Japan’s government stood ready to respond appropriately if needed.
How much did the Yen lose?
The Yen shaved off as much as 0.6% on the day to 135.22 yen per U.S. currency, plunging to its lowest level since 1998. It traded broadly flat at 134.38 yen per dollar at last.
Francesca Fornasari, the head of currency solutions at asset manager Insight Investment, noted that everything suggests the BoJ still considers loose policy the right policy to pursue. She thinks inflation will have to accelerate much more before the bank starts worrying.
Overall, developments suggest further near-term yen weakness. Still, currency market participants will likely be warier of the risk of intervention and a hawkish shift in the Japanese central bank’s policy in the week ahead – noted Currency analysts at MUFG.
The downward pressure on the yen could also encourage speculation of a return to JPY weakness not seen since the Asian financial crisis in 1997. The yen hit 140.00 at that time, and Japan had to directly intervene to support the currency.
On Monday, the euro, British Pound, and the Swiss franc all dropped to around four-week lows against the dollar on the day. The common currency declined as much as 0.6% to $1.04520. The sterling also lost 1% to $1.21920 after new data reported that the U.K. economy unexpectedly shrank in April. Moreover, the Swiss franc plummeted by as much as 0.7% to 0.99440 franc per greenback.
What about the EM currencies?
Emerging market stocks experienced their worst day in almost three months on Monday. Developing currencies also plunged in the red as a coronavirus warning from China added to concerns over soaring global inflation.
MSCI’s index for emerging market equities dropped by 3.1% on Monday while the emerging currency benchmark lowered by 0.6% – both hitting their lowest level in around three weeks. The decreases mirrored sharp drops in global markets more widely after U.S. inflation data on Friday, bolstering fears about even more aggressive policy tightening in a big week for central banks.
Cristian Maggio, the head of a portfolio strategy at TD Securities in London, stated that there is an extreme fear in forex markets about two factors – slowing global growth and inflation.
Meanwhile, authorities in China’s capital Beijing tried to contain a coronavirus outbreak, with millions of citizens facing mandatory testing. Thousands of people are under targeted lockdowns. Maggio noted that Beijing’s zero-COVID policy had revived worries over the hit to China’s economic growth. Inversion of the U.S. yield curve, which often heralds economic recession, hadn’t helped matters.
Consequently, South Africa’s rand dropped by 1.4%, hitting its lowest level in nearly one month. India’s rupee also collapsed to a record low of 78.28 per dollar, while bond yields surged to their highest levels in more than three years. Furthermore, Turkey’s lira declined to 17.27 per greenback in early trading on Monday.
