While traders remained cautious of Japanese authorities intervening, the yen weakened and surpassed the 145 per dollar mark on Friday. In the broader context, the dollar also demonstrated strength as market participants anticipated U.S. inflation data.
As indicated by Thursday’s data, the robust U.S. economy implies that the Federal Reserve has room to increase interest rates if inflation necessitates such action. U.S. benchmark 10-year yields climbed by 14 basis points on Thursday, marking the most substantial increase since late March.
In line with the developments, foreign exchange (FX) markets mirrored the trend, witnessing a 0.35 percent increase in the dollar index on Thursday. The U.S. currency gained ground against the euro, causing the latter to decline by 0.45 percent.
As Friday’s early European trading commenced, market conditions remained stable. The euro remained unchanged at $1.0857. It hovered near a one-week low, while sterling experienced minimal fluctuations at $1.2617, slightly above the previous day’s two-week low.
“One of the big themes over the past few weeks has been the positive surprises in U.S. data, and underwhelming data in the rest of the world, which is maybe bending markets back to the Fed’s messaging that we could see a second hike in Q4.”
Simon Harvey, Monex Europe head of FX analysis
Simon Harvey, head of FX analysis at Monex Europe, highlighted a significant trend seen in recent weeks. It involves positive surprises in U.S. data and lackluster data from other parts of the world.
This contrast in data could impact market sentiment and align with the communication from the Fed. It suggests the possibility of a second interest rate hike in the fourth quarter.
Markets have almost factored in an extra 25 basis point increase in interest rates by the Federal Reserve in July. However, the projections of Fed policymakers, which were made public earlier this month, showed the likelihood of another rate hike in addition to the one in July before the year concludes.
According to Harvey, although retrospective, the recent revision in the U.S. first-quarter GDP data raises a pertinent question for the markets regarding consumer resilience. The upcoming Personal Consumption Expenditures data are expected to provide insights into this matter.
The dollar’s strength pushed it to reach its highest level in seven months against the yen in Friday’s Asian trading session. This level is significant as it is the point at which Japanese authorities intervened last year to support their currency.
Although the dollar experienced gains against the yen, it could not sustain them. As a result, the dollar’s value remained unchanged for the day and was flat at 144.88 yen.
Japan cautions against currency depreciation
On Friday, Japan’s Finance Minister, Shunichi Suzuki, warned against an excessive yen devaluation. This warning follows a series of similar comments from government ministers and officials.
In September last year, the yen exceeded the 145 mark. It prompted authorities to intervene in the markets. This intervention marked the first occurrence of such action in 24 years.
“It is important for currencies to move stably reflecting fundamentals,” Suzuki said.
However, Suzuki did not express deep concern or announce any specific measures, unlike the last time authorities intervened in the currency market, where such language was used as a precursor.
Harvey said that the actions implemented in the latter part of the previous year are proving effective. Market participants are currently evaluating the dollar/yen exchange rate. They are raising doubts about the logic of pursuing additional gains, especially considering the potential overnight risk of experiencing a substantial four percent loss in their positions.
The data released on Friday revealed that core inflation in Tokyo showed improvement in June, exceeding the Bank of Japan’s two percent target for the 13th consecutive month.