The dollar maintained its position against the euro and yen on Monday, following a week marked by heightened volatility in the forex market. Investors are closely watching the Bank of Japan's (BoJ) policy review scheduled this Friday, with the yen in the spotlight after reaching fresh 34-year lows against the greenback.
The Japanese currency traded around 154.82 per dollar, not far from last week's record low of 154.79 and near the 155 level that could prompt Japanese authorities to intervene.
"There will be a focus on the BOJ meeting, but it is too soon for them to alter policy, and the market gives a change in rates no chance at all," stated Chris Weston, head of research at Pepperstone.
The easing of Middle East tensions, which had led to notable increases in the prices of the dollar, gold, and oil and declines in stocks, contributed to a more settled financial landscape on Friday. Iran's understated reaction to Israel's drone attack might have prevented a larger-scale confrontation between the two countries.
Volatility peaks as global economic events unfold
A 9.7% increase was recorded in Deutsche Bank's currency volatility index last week, reaching a peak not seen since February. This marks the most substantial weekly increase in the index since September 2022. During that period, the pound experienced a significant decline against the dollar due to turmoil in British markets triggered by government spending plans, alongside the BoJ's intervention to purchase the yen for the first time since 1998.
Apart from the Bank of Japan's meeting and a busy week for American earnings reports, investors will be getting significant data, including the US first-quarter GDP and the Fed's inflation indicator, the PCE index.
Kathleen Brooks, research director at XTB, mentioned, "FX has been a major topic for the last few weeks and might take a back seat this week as earnings take center stage."
The FX market can only think at one thing at a time and right now, it’s obsessed with the strong dollar.
Kathleen Brooks
The dollar's strength was evident during the recent International Monetary Fund/World Bank spring meetings in Washington. Additionally, the US, Japan, and South Korea issued a rare joint statement on the matter.
Following the G20 finance leaders' gathering in Washington, Bank of Japan Governor Kazuo Ueda indicated that an increase in interest rates could be considered if the yen's significant drop continues to exert upward pressure on inflation. This statement reflects the complex situation economic decision-makers face due to the yen's weakening.
The dollar's strength persisted despite the yen being the worst-performing major currency this year, with losses totaling approximately 9%. The reconsideration of Fed easing has resulted in a widespread adjustment of global rate cut forecasts. However, expectations for the European Central Bank and Bank of England to initiate cuts by mid-year remain unchanged.
According to analysts, US Treasury yields are anticipated to see minimal upward movement due to a light economic data calendar and altered perceptions of Federal Reserve policies among investors.
There has been a notable increase in the yield of two-year US Treasury notes, with a significant jump of 38 basis points recorded this month. This surge has brought the yield to its highest point in the past five months, at approximately 5%.
The Chinese currency, the yuan, hit a fresh low versus the US dollar on Monday, depreciating to 7.2518 per dollar despite the daily benchmark set by the central bank aiming to bolster its value and assistance from state-owned financial institutions.
Bitcoin's price experienced a significant uptick of 3.6%, settling at $66,384. The world's leading cryptocurrency underwent its halving event over the weekend, a process that occurs roughly every four years to decrease the rate at which new bitcoins are generated.