Yen weakens to one-year low as US-Japan rate gap outlook widens

20 Feb 2024 , 08:15 AM

In contrast to a recession in Japan and market scepticism about a near-term exit from its easy policy, sticky U.S. inflation supported the case for higher-for-longer interest rates on Tuesday, holding the yen close to a three-month low against the dollar.

Asia’s attention is focused on China’s loan prime rate (LPR) announcement, where it is anticipated that the country will lower its benchmark mortgage reference rate in an attempt to support its flagging economic development.

The offshore yuan slightly dropped to 7.2143 per dollar ahead of the result.

After surpassing the crucial 150 yen per dollar threshold for six consecutive sessions, the greenback last traded at 150.25 yen, which prompted warnings from Japanese officials in an effort to stabilise the currency.

The market’s expectations of when and how much the Federal Reserve could cut interest rates this year were further dampened by higher-than-expected U.S. producer and consumer price data released last week. Futures now point to only roughly 90 basis points of rate cuts in 2024, down from roughly 160 bps at the end of the previous year.

However, the unexpected recession that Japan’s economy experienced in the last quarter of 2018 due to weak capital investment and consumption has made investors reevaluate the likelihood that the Bank of Japan (BOJ) will soon abandon its extremely loose monetary policy.

The dollar increased in the overall market, although movements were mainly muted because Monday is Presidents’ Day in the US.

The euro dropped 0.09% to $1.0770 versus the US dollar, while the pound dropped 0.06% to $1.2588. At $0.6143, the New Zealand dollar decreased by 0.11%.

U.S. Treasury rates increased somewhat in the bond market as a result of the Fed’s repricing of expectations and last week’s inflation statistics. 

The benchmark two-year yield remained stable at 4.6565%, but the 10-year yield increased by almost 2 basis points to 4.3166%.

The dollar index, which compares the US currency to its main competitors, increased by 0.03% to 104.33.

The Australian dollar dropped to $0.6531, a decrease of 0.14%.

According to minutes released on Tuesday, the Reserve Bank of Australia’s February meeting, policymakers debated raising interest rates by an additional quarter point, but ultimately opted to maintain current levels as inflation had decreased and the labour market was loosening more quickly than anticipated.

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