NEW YORK/LONDON: The dollar rose on Tuesday to a fresh 20-year high against the Japanese yen, supported by the divergence in monetary policy between a Federal Reserve determined to keep a lid on soaring inflation and a Bank of Japan that has kept interest rates ultra-low.
The greenback hit 128.765 yen, the highest since May 2002. It was last up 1.4% at 128.74 yen. The dollar has risen 5.4% on the yen so far this month, on pace for its second-biggest monthly percentage gain since 2016 after last month’s 5.8%.
“The BOJ has done the opposite of normalization. They have dug their heels in,” said Richard Benson, co-chief investment officer at Millennium Global Investments in London.
But he believes Japanese monetary authorities could actually intervene to strengthen the yen, but it’s not about a particular level.
“I wouldn’t be surprised if the BOJ intervenes because they have a lot of dollars and they can just sell them easily,” Benson noted. “There are obvious numbers to talk about and levels, but the narrative is very much about speed as opposed to level. So slow and gradual is fine.”
The dollar index, which measures the greenback against six other currencies, also climbed on Tuesday, rising past 101 for the first time in more than two years. It was last up 0.2% at 100.96.
Providing a dollar lift is the continued rise in US yields. US benchmark 10-year Treasury yields hit 2.93% on Tuesday, the highest since December 2018, while US 10-year inflation-linked bond yields rose, within touching distance of turning positive for the first time in two years.
The greenback likewise rose to 0.9492 francs versus the Swiss currency, the highest since July 2020 . It last changed hands at 0.9482 francs, up 0.4%.
The euro recovered some ground, trading 0.1% higher against the dollar at $1.0791, but stayed just off last week’s two-year low of $1.0756.
“Policy divergence between the Fed and low-yielding central banks (European Central Bank, Bank of Japan) continues to argue in favour of USD strength,” said Francesco Pesole, FX Strategist at ING.
US inflation is “far too high,” St. Louis Federal Reserve Bank President James Bullard said on Monday as he repeated his case for increasing interest rates to 3.5% by the end of the year.
In the meantime, the BOJ has been intervening to keep the yield on Japanese 10-year government bonds around 0% and no higher than 0.25%.
Many investors are betting the yen has further to fall. The latest CFTC data for the week ending April 12 shows net short yen positions are the largest in three and a half years.
Japanese Finance Minister Shunichi Suzuki made the most explicit warning against the yen’s recent slump on Tuesday, saying the damage to the economy from a weakening currency at present is greater than the benefits from it.
The Australian dollar briefly rose to US$0.7371 from Monday’s one-month low, given some support by minutes published Tuesday from the Reserve Bank of Australia’s April policy meeting. The minutes suggested that the RBA was edging closer to raising interest rates for the first time in more than a decade.
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