As traders await U.S. inflation data due out this week for clues as to the pace of Federal Reserve policy tightening, the dollar rose to a one-month high against the yen on Wednesday, boosted by a rise in Treasury yields to multi-year highs overnight as traders wait for clues as to the pace of Federal Reserve policy tightening.
After European Central Bank President Christine Lagarde earlier this week downplayed expectations of quick interest rate hikes, the euro fell further against the Japanese yen, reversing course from a three-month high against the Japanese yen.
Both the European Central Bank and the Federal Reserve adopted a more hawkish tone last week, which surprised the markets and drove yields on euro zone and US debt skyrocketing in anticipation of rates rising faster and higher than previously anticipated.
The dollar surged to 115.69 yen at one point in early Asian trading, the highest level since Jan. 10, before reversing course and closing 0.08 percent lower at 115.43 yen in late trading.
The yield on the 10-year Treasury note rose to as high as 1.97 percent on Tuesday, the highest level since November 2019.
This is the first time that the yield on the two-year note, which is more sensitive to interest rate predictions, has exceeded 1.347 percent since February 2020.
CME’s FedWatch Tool shows that markets are pricing in a more than 70 percent possibility of a 25 basis point rise and a roughly 30 percent chance of a 50 basis point increase during the March meeting of the Federal Open Market Committee (FOMC).
According to San Francisco Fed President Mary Daly, the country’s already-high inflation may rise even farther before it begins to improve.
Consumer prices in the United States are expected to have increased by 7.3 percent year on year in January, according to economists polled by Reuters. The data will be released on Thursday.
The dollar index, which measures the value of the greenback relative to six major currencies, crept 0.02 percent higher to 95.614 on Monday, after rebounding from a two-and-a-half-week low of 95.136 touched on Friday. At the end of the month, it reached its highest level since June 2020, at 97.441.
A client note from Westpac strategists stated that the dollar index is “in a holding pattern as markets weigh the prospect of an abrupt Fed policy tightening against the ECB’s hawkish backflip.”
In spite of the fact that the eurozone’s central bank is becoming more aggressive, they believe the dollar’s “medium-term bull trend” is still intact and that the dollar index is a good buy on falls to the low 95 level, according to their analysis.
Lagarde, the head of the European Central Bank, said on Monday that there was no need for “substantial tightening,” attempting to dampen mounting expectations for strong action after she last week hinted that interest rates could be raised this year.
The euro was virtually unchanged at $1.1420 on Monday, following a slow decline from a high of $1.1483 on Friday, which matched the currency’s best level in nearly three months at the time.