Title: Dollar Strengthens as Yields Rise, Yen Approaches Intervention Zone
Date: June 28, 2023
The dollar continued to strengthen against major currencies on Wednesday, reaching a 10-month high, as Treasury yields remained elevated amid expectations of higher interest rates in the United States. Meanwhile, the Japanese yen stumbled towards a closely-watched intervention zone.
In early Asia trade, the British pound slid to a fresh six-month low of $1.2145, facing pressure from the stronger US dollar. The pound is on track to mark its worst quarterly decline in a year, with a decrease of more than 4%.
The U.S. dollar index, a gauge of the greenback’s strength against a basket of major currencies, last stood at 106.20, having reached a 10-month high of 106.26 during the previous session. The euro remained near a six-month low, trading at $1.0569.
Tina Teng, a market analyst at CMC Markets, noted, “The U.S. dollar is stickier to the upside than the downside,” highlighting the ongoing shock in the markets due to the Federal Reserve’s unexpectedly hawkish stance. Teng suggested that it’s likely the Fed will hike rates at least one more time.
Federal Reserve officials have recently hinted at the possibility of further interest rate hikes. While rates were kept steady last week, the central bank has strengthened its hawkish monetary policy stance.
As a result, U.S. Treasury yields have climbed to multi-year highs, leading money markets to adjust their expectations regarding future rate increases and tighter monetary conditions.
The benchmark 10-year yield stood at 4.5254%, after reaching a 16-year high of 4.5660% in the previous session. Meanwhile, the two-year yield was at 5.0582%.
The yen has been adversely affected by the high U.S. yields, with the USD/JPY pair inching higher to 149.01 per dollar. This follows its previous drop to an 11-month low of 149.185. The dollar/yen pair is highly sensitive to changes in long-term U.S. Treasury yields, especially the 10-year yield.
Traders are closely monitoring the yen’s decline towards the psychological level of 150 per dollar, as it signals the possibility of Japanese authorities intervening in the foreign exchange market. The 150 zone is considered a red line that could trigger intervention, similar to what occurred last year.
“The fundamental upside pressure (to dollar/yen) from bond yields is simply too great to ignore,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. Tan further emphasized that even if intervention occurs, it would not permanently drive the dollar/yen pair down unless bond yields significantly retreat.
In other currency news, the Australian dollar fell slightly by 0.04% to $0.6395, ahead of the release of Australian inflation data later on Wednesday. Meanwhile, the New Zealand dollar saw a modest 0.06% increase to $0.5948.
As the prospect of higher-for-longer U.S. rates and elevated Treasury yields persist, global currency markets remain volatile, with investors closely watching for any shifts in economic indicators or central bank policies that could impact exchange rates.
Disclaimer: This article is for informational purposes only and should not be seen as financial advice.