The US dollar strengthened significantly against the Japanese yen and the euro on Wednesday, reaching its highest level against the yen since mid-1990. The unexpected rise in U.S. inflation data in March has caused traders to push back their expectations for a Federal Reserve interest rate cut from June to September.
According to data released by the Bureau of Labor Statistics, the Consumer Price Index (CPI) rose 0.4% month-on-month and 3.5% year-on-year in March, exceeding analysts' expectations. The core inflation rate, which excludes food and energy components, also increased by 0.4% month-on-month and 3.8% year-on-year. Consequently, the probability of a Fed interest rate cut in June dropped to 19% from 57%, according to the CME's FedWatch tool.
Chief Economist Joseph Lavorgna stated at the SMBC Nikko Securities that the core rate of inflation has accelerated for four months straight and suggested that additional data and more time would be needed to convince traders that inflation is decreasing.
"What that means is the timing of Fed easing is going to get pushed out," he said.
Trading results
In midday trading, the dollar index experienced a 1.1% increase, settling at 105.22. The euro experienced a decrease of 1.1%, resulting in it being valued at $1.0737 versus the dollar, while the dollar underwent an increase of 0.7% and was worth 152.895 yen against the Japanese yen.
Traders were watching closely for any signs of intervention from Tokyo as the yen continued to weaken. Japan's central bank intervened three times in 2022 to sell dollars and buy yen, most recently in October when the Japanese currency reached a 32-year low against the dollar.
The JPY has been under pressure for years due to higher US interest rates and near-zero Japanese interest rates, causing investors to move their funds out of the yen and into dollars to earn carry trade returns. Societe Generale analysts noted that the dollar-yen pair is more sensitive to long-term rates than the euro-dollar pair and is currently unstable at these levels.
Non-commercial short positions in yen futures had risen to 143,230 contracts as of April 2, the largest since December 2023, according to data from the Commodity Futures Trading Commission (CFTC).
I would say there is a 30 percent chance of Japanese intervention this month. That move today, that quick move down, it just seems a bad time to fight it
Adam Button
FOREXLIVE's chief currency analyst, Adam Button, stated that there is a 30% chance of Japanese intervention in the currency market this month due to the rapid decline in the value of their money.
"Japan doesn't want the yen to weaken further, but this is a fundamental move of broad U.S. dollar strength. I don't see the argument for fighting this move from Japan right now, it's not a yen move, it's a broad U.S. dollar move," he further noted.
Meanwhile, analysts at Societe Generale warned that the dollar-yen pair could experience an acceleration in either direction on a significant surprise.
Japanese authorities' potential entry into the market has kept traders on their toes, with the yen remaining unresponsive despite the abandonment of negative interest rates. The CPI data release caused traders to significantly reduce their bets on Fed rate cuts this year from about three or four to under two.
The recent unexpected rise in US inflation data has shifted the focus of market participants towards upcoming releases and the Federal Reserve's potential response through interest rate hikes. This sudden development has instilled a sense of unease among investors, causing them to reevaluate their risk tolerance and consider more stable investment alternatives like the Swiss franc and gold.
The impact of this strengthening US Dollar against the Japanese Yen and its effect on the Euro is far-reaching, with potential consequences for various stakeholders within the foreign exchange market, including but not limited to forex brokers, online brokers, crypto exchanges, and other entities in the finance industry.