The U.S. dollar hit more than a two-month high on Wednesday after Federal Reserve governor Philip Jefferson indicated a longer-than-anticipated monetary tightening cycle.
The dollar index, which tracks the greenback's value versus six major currencies, climbed to 104.63 earlier in the trading session, the highest since March 16. The U.S. currency strengthened against the euro, with the latter falling to $1.066 or the lowest in over two months.
Against the greenback, the yen gained 0.34 percent to trade at 139.33. The Japanese currency previously traded over its key 140 level, prompting the country's financial regulators to conduct an emergency meeting to discuss risks in financial markets.
Analysts say a sharp lift in the dollar/yen trading will force Japan to take action because a weakening yen means reduced purchasing power. In 2022, the Japanese government intervened in the forex market by selling dollars and purchasing yen after the country's currency weakened to nearly 152 yen per dollar.
Jefferson said Wednesday that an interest rate hike pause would enable the central bank "to see more data before making decisions about the extent of additional policy firming." However, a pause in the central bank's upcoming meeting would not mean an end to the monetary tightening cycle.
Philadelphia Fed President Patrick Harker also said Wednesday that he would likely support a "skip" in the rate hike at the June 13-14 policy meeting. Evercore ISI vice chairman Krishna Guha said the remarks by Jefferson and Harker were likely discussed beforehand with Fed chairman Jerome Powell, meaning that they represent a collective view of the central bank's leadership.
Fed funds futures now predict a one-in-three chance for a rate hike this month, down from the over 60 percent chance predicted earlier.
The expectations that the Fed would maintain high-interest rates for longer prompted investors to pivot to the safe haven dollar. The new reports from China about weakening manufacturing activity also supported the U.S. dollar, say analysts. The Chinese yuan traded at 7.1197 per dollar, hovering around its lowest level against the greenback since November last year.
"It gives investors a little something to worry about, if you will, about the global recovery and possibility that we'll see the global economy slip into a recession."
Chris Gaffney, TIAA Bank president of world markets
Analysts say the resolution of the debt ceiling crisis could bring the dollar's value down because of increased risk appetite in the market.
Treasury yields, oil
U.S. Treasury yields generally declined on Wednesday after remarks from Fed officials. The yield of 10-year notes fell by 6.7 basis points to 3.629 percent, while the two-year yield posted a 9.7-basis-point to 4.3758 percent. The 30-year yields also plunged 5.3 basis points to 3.848 percent.
Analysts have warned that the U.S. Treasury Department will likely conduct large-scale sales of its bills, which amount to more than $1 trillion, to raise funds to meet the nation's payment obligations. This will affect the private sector, draining liquidity from the market.
Oil prices also declined for the third consecutive session in the Asian market on Thursday local time after new data suggested a significant build in U.S. crude supply last week. Analysts said the expectations of an oversupply and signs of weaker demand from China triggered sell-offs in the market.
U.S. West Texas Intermediate crude fell by 0.6 percent or 39 cents to $67.70 per barrel in early trading. Futures tied to Brent crude for August delivery declined by 40 cents to $72.20.
Investors are now anticipating the OPEC+ meeting on June 4. HSBC and Goldman Sachs have predicted that OPEC+ members are unlikely to announce further cuts in production at the meeting.