The Japanese yen slumped to the weakest level in more than a year against the dollar as mounting bets that the Federal Reserve will tighten policy first boosts the appeal of U.S. assets.
The currency fell as much as 0.4%, sliding for a third day to 111.10 per dollar, the lowest since March 2020. Traders are betting that the Fed could hike rates twice in 2023, while the Bank of Japan is seen holding policy loose for longer.
That divergence is spurring Japanese investors to look beyond their own shores for returns and could see the currency pair rally to test 115, a level not seen since 2017, according to Neil Jones, head of foreign-exchange sales to financial institutions at Mizuho Bank Ltd.
“We’re looking for dollar-yen to break out on the upside, said Jones. “Sovereign divergence is coming back into play. The BOJ stands on hold while other G-7 central banks are pushing rates higher.”
The slide in the yen is the latest symptom of the brighter outlook for global economic growth. As the fallout from the pandemic eases, traders are abandoning haven currencies in favor of higher-returning ones.
Yield Appeal
The dollar is the best-performing currency across Group-of-10 peers over the past month, bolstered by nominal Treasury yields that tower over equivalent securities in major economies. The rate on 10-year government bonds in the U.S. is 1.49% compared with around 0.05% in Japan.
The yen’s slide accelerated after passing the 111-per-dollar mark, seen by traders as a key psychological threshold, to touch 111.10. It pared some of those losses and was trading at 111 as of 3:20 p.m. in New York.
For Toronto Dominion Bank, there may be hurdles to clear for any further extension of the move.
“Dollar-yen appears to be tracking longer-term real rate differentials fairly closely,” said Ned Rumpeltin, European head of foreign-exchange strategy at TD Bank. “We suspect stops and a fair degree of barrier interest could be lurking above 111.”
MUFG has a “bullish bias” in dollar-yen, citing the Fed as the “dominant influencer” for the currency pair following the central bank’s meeting last week, where it signaled a faster pace of tightening than some had expected.
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“The window of U.S. dollar strength opened by the Fed last week is perhaps with us over the coming weeks,” wrote MUFG strategists Derek Halpenny and Lee Hardman in a note to clients.
“We don’t believe the Fed will want to see the previous sharp rise in inflation expectations unravel quickly,” they said.
— With assistance by Susanne Barton