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Yen jumps as bets for dovish Fed pressures dollar
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Japanese yen and US dollar banknotes are seen in this illustration picture taken on Sept. 23, 2022. (Reuters/FLORENCE LO)
T
he US dollar declined broadly on Monday and slipped sharply against the yen in particular as investors bet on a dovish tone emerging in the Federal Reserve's July policy meeting minutes and Chair Jerome Powell's upcoming speech at Jackson Hole.
The minutes, due on Wednesday, and Powell's speech on Friday are likely to be the main drivers of currency movement for the week, which will also see inflation data from Canada and Japan alongside Purchasing Managers' Index readings across the US, euro zone and UK.
Against the yen, the greenback fell more than 1 percent to 146.01, after earlier slipping below the 146 yen level.
Analysts attributed the big move lower to broad dollar weakness, along with the potential for further policy divergence between the US and Japan.
Bank of Japan (BOJ) Governor Kazuo Ueda is set to appear in parliament on Friday, where he is expected to discuss the central bank's decision last month to raise interest rates.
"Certainly seems like a dollar-driven move, but market is also likely positioning for policy divergence to be evident again later in the week with Powell to continue to point towards a September rate cut when he speaks at the Jackson Hole conference while BOJ's Ueda could keep an element of hawkishness on the table," said Charu Chanana, Saxo's head of FX strategy.
The BOJ's hawkish tilt last month contributed to the early August market turbulence in the wake of a massive unwinding of yen-funded carry trades, triggering a heavy selloff in risk assets and sending stock markets, including the Nikkei, crashing.
The volatility back then was compounded by a slew of softer-than-expected US economic data - in particular, a weak jobs report for July, as investors feared the world's largest economy was headed for a recession and that the Fed was being slow in easing rates.
Elsewhere, the euro last bought $1.1043, edging towards an over seven-month high of $1.10475 hit last week. Sterling rose to a one-month high of $1.2960 earlier in the session and was last at $1.2957.
Against a basket of currencies, the dollar fell to a seven-month low of 102.11.
Traders have fully priced in a 25-basis-point rate cut from the Fed in September, with a 24.5 percent chance of a 50 bp move. Futures point to over 90 bps worth of easing by year-end.
"Markets will be laser focused to what Powell has to say at the end of this week, and on that, I think it will be a great opportunity for Powell to either endorse or push back market pricing," said Carol Kong, a currency strategist at Commonwealth Bank of Australia.
"I think he'll at least greenlight a rate cut at the September meeting. If anything, I think he'll try to retain optionality because we do have some more data before the next meeting."
The Australian and New Zealand dollars struck one-month highs of $0.6694 and $0.6086, respectively, as risk sentiment picked up on expectations for a dovish Fed outcome.
The Aussie was also helped in part by the paring of bets for imminent rate cuts Down Under, after Reserve Bank of Australia Governor Michele Bullock said on Friday it was premature to be thinking about policy easing.
