On Wednesday, the U.S. dollar surged to its highest level in 10 months when measured against a range of major currencies.
The U.S. dollar index surged to 106.84, marking its highest point since November 30. The euro fell to $1.04880, its lowest value since January 6.
Meanwhile, the euro reached its lowest point in nearly nine months, and the yen was at its lowest in 11 months. The yen faced challenges due to the elevated U.S. yields, dropping to an 11-month low of 149.71 against the dollar.
This trend is driven by investor confidence that the U.S. economy will excel compared to its rivals, mainly due to high interest rates. The yield of the 10-year Treasury benchmark reached the highest levels observed since October 2007, supporting the dollar’s rally.
Robust economic data in the U.S. contradicted investor slowdown predictions. Wednesday’s data revealed increased orders for durable goods manufactured in the U.S. during August.
It was driven by increased demand for machinery and various other products, which offset a decline in civilian aircraft orders. Business spending on equipment also regained momentum after experiencing a slowdown at the start of the third quarter.
Minneapolis Fed President Neel Kashkari explained Wednesday that it remained uncertain whether the U.S. central bank had completed its rate hikes, given the substantial evidence of sustained economic strength.
“The U.S. is most able to cope with these new challenges - higher interest rates and higher energy prices. Even if the news stream from the U.S. is not that great, it still looks relatively better,” said Marc Chandler, chief market strategist at Bannockburn Global Forex, as quoted by Reuters.
With the sterling also dipping — reaching $1.21110, its lowest point since March 17 — Dane Cekov, senior F.X. strategist at Nordea, noted that markets saw higher long-term yields in the U.S. for an extended period. He concluded it was the main driver for the dollar surge.
Elsewhere, the Swiss franc weakened to 0.99240 against the greenback, marking its lowest point since March 22. Market surprise ensued on Thursday when the Swiss National Bank unexpectedly halted its ongoing series of interest rate hikes, causing the franc to depreciate significantly.
Intervention possibility for yen
The dollar/yen pairing is historically responsive to shifts in long-term U.S. Treasury yields, especially those tied to the 10-year maturity. The yen’s recent depreciation, edging closer to the significant threshold of 150 per dollar, has heightened traders’ vigilance for any indications of intervention by Japanese authorities.
This concern has intensified as officials have increased their verbal warnings regarding the declining currency. Bank of Japan (BoJ) Governor Kazuo Ueda said policymakers were monitoring its effects on economic and price trends.
On Friday, the BoJ reaffirmed its commitment to ultra-low interest rates and its dedication to supporting the economy until inflation reaches its target sustainably. It dispelled market speculation that the BoJ would gradually scale back its extensive monetary stimulus due to the possibility of rising inflation.
Alvin Tan, head of Asia FX strategy at RBC Capital Markets, commented that the fundamental upside pressure on dollar/yen from bond yields was too significant to overlook. However, it would only result in a permanent decline of the dollar/yen exchange rate if bond yields also decline.
The minutes of the BoJ’s July meeting published on Wednesday revealed a consensus among policymakers regarding the importance of retaining accommodative monetary policies. There was a divergence of opinions regarding the timing of the central bank’s potential exit from negative interest rates.