Dollar reaches a 6-month high against the yen in early trade

23 May 2023 , 08:17 AM

On Tuesday, the dollar reached a six-month high against the yen as predictions that U.S. rates will remain higher for longer rose and risk sentiment remained shaky due to the debt ceiling deadlock.

Some of the Federal Reserve’s top officials who spoke on Monday signalled that there is still more monetary policy tightening to be done.

Neel Kashkari, president of the Minneapolis Fed, stated that the U.S. rates may need to increase ‘north of 6%’ in order for the Fed’s inflation target of 2% to be met, while James Bullard, president of the St. Louis Fed, suggested that the Fed may still need to hike rates by another half-point this year.

Early Asia trade saw the dollar increase to a nearly six-month high of 138.80 vs the Japanese yen, reflecting the dramatic contrast between a still-hawkish Fed and a very dovish Bank of Japan.

According to the CME FedWatch tool, the probability that the Fed will announce another rate hike of 25 basis points next month has decreased from 20% to approximately 26%.

The likelihood of interest rate reductions later this year has also decreased, with rates projected to remain at 4.7% by December.

The offshore yuan was also held near its most recent five-month low by the dollar, which recently purchased 7.0547.

China maintained its benchmark lending rates steady on Monday as the potential for any significant monetary easing to support the nation’s post-COVID economic recovery was constrained by the falling yuan and increasing yield differentials with the United States.

In contrast to a higher dollar, the euro lost 0.05% of its value to $1.0808 and is currently down roughly 2% for the month. This reverses two consecutive months of gains.

The value of the pound rose 0.02% to $1.2440.

Concerns about the approaching US debt ceiling deadline were also on the minds of investors, which restrained risk sentiment and bolstered the safe-haven US dollar.

With just 10 days left until a potential default, President Joe Biden and House Speaker Kevin McCarthy decided to stop their meetings on Monday without reaching an agreement on how to raise the $31.4 trillion debt ceiling for the United States government.

The yield on the one-month Treasury bill yesterday increased by more than 10 bps to 5.7921% as short-end U.S. Treasury yields increased in response to market concerns. When bond prices decline, yields increase.

The yield on two-month Treasury bills most recently stood at 5.3246% after reaching a high of 5.4330% the previous session. 

The U.S. dollar held steady at 103.27 against a basket of currencies, not far from a two-month high reached last week.

Kiwi gained 0.07% to $0.6290, while the Australian dollar increased 0.05% to $0.6656.

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