SINGAPORE: The yen fell through the psychological 120 level for the first time since 2016 on Tuesday, after a hawkish speech from Federal Reserve Chair Jerome Powell raised bets on higher US interest rates and widened the policy gap on a dovish Bank of Japan.

The yen fell about 0.4% to briefly hit 120.08 per dollar in early Asia trade. It is down about 4% this month as leaping US yields have lured flows from Japan.

“Widening policy divergence is continuing to push the yen to more deeply undervalued levels against the US dollar,” MUFG currency analyst Lee Hardman said.

The dollar was broadly stronger elsewhere and pushed the euro down 0.2% to $1.0992.

Yen starts week on back foot, with central bank policies in focus

US bonds and interest-rate futures took a further flogging overnight after Powell said policymakers needed to move “expeditiously” and put the possibility of 50-basis point (bp) rate hikes on the table.

Fed funds futures moved to price in an almost 2/3 chance of a 50 bp hike in May and now anticipate the benchmark rate - currently below 0.5% - exceeding 2.5% in 2023.

Benchmark 10-year yields rose 14 bps and, at 2.0914%, the gap on anchored 10-year Japanese yields is the widest in more than 2-1/2 years.

The moves lent broad strength to the dollar elsewhere, as have nerves about the intensifying war in Ukraine which is lifting oil prices back toward early-month highs.

The Australian dollar was also softer at $0.7386, as was the kiwi at $0.6873.

The US dollar index rose 0.2% to 98.700. Sterling eased 0.2% to $1.3144.

In offshore trade, the Chinese yuan was at 6.3739 to the dollar, having pulled back from recent highs and settled in a new range as investors await promised monetary easing.

Although the Chinese central bank left 1-year and 5-year loan prime rates unchanged on Monday, we still expect the (People’s Bank of China) to lower the reserve ratio requirement by 50 bp again, as early as Q1 2022,“ Scotiabank strategist Qi Gao said. “We maintain our short USD/CNH spot position.”