On Tuesday, the dollar continued to gain ground against the Japanese yen, hitting a fresh two-decade high. Rising concerns about inflation also pushed up US bond yields.
The dollar was also higher against other currencies, such as the euro, sterling, and the Swiss franc. It was also up against the Australian dollar, trading in a tight range as investors waited for the country's central bank to decide on its interest rate hike.
The dollar hit a high of 132.305 against the Japanese currency, which was its highest level since April 2002. The USD-yen pair was up 0.17% from its previous daily close. The 10-year Treasury yield, which moved up to 3.05% for the first time in four weeks, also supported the dollar.
Impact of strengthening dollar against yen
Unlike in the US, Japanese yields are not under zero. This is because the country's central bank has a policy that controls the yield curve. Bank of Japan Governor Haruhiko Kuroda reiterated his commitment to maintaining a powerful monetary stimulus.
"Japan is absolutely not in a situation that warrants monetary tightening, as the economy is still in the midst of recovering from the pandemic's impact," Kuroda said.
Despite the harmful effects of the weakening of the Japanese currency on the country's households and retailers, the Bank of Japan governor noted that it's still beneficial for regional areas by attracting foreign tourists. A weaker Japanese currency is also expected to positively affect the country's economy as long as the moves are stable.
"As long as the moves are stable and not very sharp, a weak yen in general is likely to have a positive impact on Japan's economy," Kuroda continued.
Australia blames Japan's reliance on energy imports
Aside from yield differentials, the Commonwealth Bank of Australia also cited Japan's reliance on energy imports as one of the factors that led to the weakening of the Japanese currency.
According to Carol Kong, a senior analyst at Commonwealth Bank of Australia, the Japanese currency will likely benefit from safe-haven flows as long as the country's current account remains in a surplus.
Kong also noted that the dollar's rapid appreciation against the Japanese currency in March and April was unlikely to continue. Instead, she expects the dollar to trade within the 126-131 range.
"We consider JPY will continue to benefit from safe haven flows so long as Japan's current account remains in surplus," Kong said. "As such, we do not anticipate a repeat of the rapid USD/JPY appreciation seen in March and April."
Dollar may continue to rally
The robust jobs data released in the US last week pushed investors to believe that the country's inflation rate is still rising. This could compel the Federal Reserve to increase its monetary stimulus.
A rise in consumer prices would provide the Fed with more ammunition to raise interest rates next week. Since last week's data suggested that inflation is still rising, investors are expecting a half-point increase in the policy rate.
Economists expect the consumer price index report to show that inflation is still rising. However, they noted that the odds of a recession remain low.
However, investors are still waiting for more inflation reports to provide a clear signal on when the central bank will start to reduce its monetary stimulus.