Wed, December 07, 2022

More Trouble Ahead for the Yen Amid U.S. Yield Rise


On Wednesday, the dollar ruled everything it surveyed, reaching a new 24-year top against the yen and nearing a 20-year high against the euro as U.S. economic data supported the Federal Reserve’s intention to continue its aggressive policy tightening.


The American dollar was also boosted by global economic turbulence that drove investors to safety. The euro slumped below 99 cents after falling as low as $0.9864 overnight, its lowest since late 2002, while the dollar rose as high as 144.38 yen in Asia trade, reaching the mark for the first time since August 1998. Due to this, the U.S. dollar index, which compares the dollar to six important rivals, rose to a 20-year high of 110.69 early Wednesday.


Although it is expected that the European Central Bank will raise interest rates by a significant 75 basis points on Thursday, the weakening European economy and Russia’s decision to keep the vital Nord Stream 1 gas pipeline closed indefinitely are doing nothing to strengthen the euro.


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In contrast, a study released yesterday revealed that the U.S. services sector unexpectedly expanded last month. This finding supports the idea that the economy is not in a recession and gives the Fed room to raise interest rates by another 75 basis points on September 21. The yen, however, saw the most dramatic movements because of its steep decline even by recent standards. Since the end of August, the dollar has increased 3.7% from 138.96 yen.


The 10-year Treasury note’s yield increased to 3.365% in Tokyo trade, the highest level since June 16, and a sign that the Japanese yen is becoming increasingly sensitive to changes in long-term U.S. interest rates. According to Davis Hall, head of capital markets at Indosuez Wealth Management Asia, the rate at which the dollar is rising versus the yen is growing out of hand and is at risk of being unanchored. He added that right now you’re pulling everyone in by throwing in the towel. Without the Ministry of Finance intervention, we may reach 148.


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