The US dollar rose to a new eight-week high against the yen on Friday and held onto a five-week high against the pound as the Federal Reserve’s cautious approach to interest rate reduction contrasted with more dovish positions abroad.
The dollar index, which compares the value of the dollar to six major currencies—the yen, sterling, euro, and Swiss franc—soared by 0.41% overnight, wiping out weekly losses in the wake of the Swiss National Bank’s second rate cut and indications from the Bank of England that a reduction would occur in August.
In the meantime, the Bank of Japan’s decision last week to postpone cutting its stimulus program for buying bonds until its July meeting has kept the yen weak.
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Tony Sycamore, an IG market analyst, stated that as a result, “traders punished the yen with renewed enthusiasm,” pushing it above the eagerly anticipated 159 per dollar milestone on Friday.
“The BOJ’s timeline is sharply out of sync with the markets, and this misalignment will likely force the BOJ to act to support the yen (via currency intervention) sooner than it might have needed to,” Sycamore stated.
At the request of Japan’s finance minister, the BOJ invested almost 9.8 trillion yen, or $61.64 billion, to recover the value of the currency from its 34-year low of 160.245 per dollar, which was attained on April 29.
Yet, Masato Kanda, Japan’s top currency diplomat, emphasized on Friday that Tokyo is prepared to intervene further and with “resolute” force against “speculative, excessive volatility”.
The dollar began the day at 158.875 yen, down 0.04% from its previous high of 159.12.
After rising 0.78% over night, the US dollar barely moved, closing at 0.8909 Swiss franc.
After two weeks of advances, the dollar index dropped 0.09% to 105.54, heading for a flat week’s end.
With a 0.05% increase, sterling reached $1.26635, staying close to Thursday’s low of $1.2655, which was last observed on May 17. While the BoE maintained the current rate of interest, several decision-makers remarked that it was “finely balanced” not to cut.
The euro recovered part of its 0.39% decline on Thursday, rising 0.17% to $1.07198. This month, the European Central Bank began reducing interest rates.
Even as inflation has decreased and the labor market has relaxed, Fed members maintained their policy at their June meeting and reduced their earlier predictions for three quarter-point cuts this year to just one.
Senior corporate FX trader at Convera James Kniveton stated, “The resilience of the U.S. economy has afforded the Federal Reserve a unique position, enabling the U.S. central bank to employ higher interest rates as a tool to combat inflation more swiftly than it otherwise could.”
“With other major central banks adopting more dovish stances, this has the potential to continue to bolster the dollar over the short to medium term.”