© Reuters. FILE PHOTO: Japanese yen and U.S. dollar banknotes are seen with a currency exchange rate graph in this illustration picture taken June 16, 2022. REUTERS/Florence Lo/Illustration/File Photo
By Karen Brettell
NEW YORK (Reuters) - The dollar hit an 11-month high against the Japanese yen on Monday and an almost 10-month high against a basket of currencies after the Federal Reserve last week signaled that it could raise interest rates further and is likely to hold them higher for longer.
The hawkish rate outlook from the Fed sent U.S. Treasury yields higher and boosted demand for the greenback.
The yen was also hurt after the Bank of Japan on Friday maintained ultra-low interest rates and its pledge to keep supporting the economy until inflation sustainably hits its 2% target, suggesting it was in no rush to phase out its massive stimulus program.
"According to BoJ Governor Kazuo Ueda, there was no sign yet of stable inflation on a sustainable basis so that the BoJ will patiently continue with monetary easing under the current framework. That was a clear dampener for the yen," said Esther Reichelt, FX analyst at Commerzbank (ETR:CBKG).
The dollar reached 148.97 yen, the highest since Oct. 25.
The Japanese currency remained within striking distance of 150, a level which some market watchers saw as a line in the sand that would spur forex intervention from Japanese authorities similar to that of last year.
The yen is also suffering as the gap between 10-year Treasury and Japanese bond yields widens, with the U.S. debt yields rising at a faster pace than Japan’s.
"The U.S. is underperforming relative to Japan," said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto. "Whenever we do see this widening in Treasury versus JGB yields, especially for 10s, that tends to transmit into dollar/yen a little bit more forcefully.”
The gap between 10-year U.S. and Japanese government bond yields reached 382 basis points on Monday, the widest spread since Nov. 10.
The dollar index hit 106.10, the highest since Nov. 30.
The euro dropped to $1.05750, the lowest since March 16. The euro is weakening against the U.S. dollar on the view that the European Central Bank is unlikely to raise rates further.
“Whereas the Fed is still very data-dependent, and meeting by meeting, the ECB has basically signaled that they are at terminal right now, so even that slight subtle shift in tone between the two central banks in our minds is enough to keep the euro/dollar somewhat anchored for now,” Rai said.
Chicago Fed President Austan Goolsbee said on Monday that inflation staying stuck above the Fed's 2% target remains a greater risk than tight central bank policy slowing the economy.
The ECB's record high deposit rate could help cut inflation to 2%, ECB President Christine Lagarde said on Monday, repeating the bank's guidance that neither promises nor rules out further rate hikes.
Meanwhile, with central banks globally indicating they are likely to hold rates higher for longer, traders are focusing on potential problem areas.
These include housing markets in Australia, Canada and New Zealand, where floating rate mortgages are common.
Those concerns are "potentially keeping the dollar a little bit firmer on an index level basis," said Rai.
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Currency bid prices at 3:00PM (1900 GMT)
Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid
Previous Change
Session
Dollar index 105.9800 105.5800 +0.39% 2.406% +106.1000 +105.5100
Euro/Dollar $1.0587 $1.0645 -0.54% -1.19% +$1.0655 +$1.0575
Dollar/Yen 148.8250 148.3900 +0.30% +13.52% +148.9500 +148.2500
Euro/Yen 157.57 157.93 -0.23% +12.31% +158.1700 +157.4900
Dollar/Swiss 0.9124 0.9070 +0.50% -1.42% +0.9135 +0.9067
Sterling/Dollar $1.2208 $1.2245 -0.28% +0.96% +$1.2250 +$1.2195
Dollar/Canadian 1.3470 1.3481 -0.07% -0.58% +1.3491 +1.3455
Aussie/Dollar $0.6420 $0.6441 -0.32% -5.81% +$0.6447 +$0.6404
Euro/Swiss 0.9658 0.9654 +0.04% -2.40% +0.9685 +0.9654
Euro/Sterling 0.8670 0.8692 -0.25% -1.97% +0.8702 +0.8669
NZ $0.5963 $0.5961 +0.05% -6.07% +$0.5974 +$0.5944
Dollar/Dollar
Dollar/Norway 10.7990 10.7600 +0.23% +9.89% +10.8200 +10.7180
Euro/Norway 11.4386 11.4899 -0.45% +9.00% +11.4640 +11.4076
Dollar/Sweden 11.0567 11.1356 -1.06% +6.23% +11.1459 +11.0130
Euro/Sweden 11.7104 11.8359 -1.06% +5.03% +11.8654 +11.6865
