This illustration shows yen and dollar bills for March 2023. The yen fell today, reversing some of last week’s strong gains on weak growth data, while the dollar firmed as recent inflation data confirmed the Federal Reserve’s view that it will cut interest rates this year.
LONDON >> Today, the yen weakened due to disappointing growth data, while the dollar remained relatively stable. Recent inflation figures support expectations for the Federal Reserve to implement interest rate cuts this year.
With US markets closed and several holidays observed in China, Taiwan, and South Korea, trading volumes may be thinner for the rest of the day.
The yen dropped 0.4% to 153.32 yen per dollar, following a nearly 3% increase last week, strongly influenced by Prime Minister Sanae Takaichi’s recent electoral victory for the Liberal Democratic Party. This marked the yen’s largest weekly rise in about 15 months.
However, the latest data also exposed some hurdles for Mr. Takaichi’s administration, showing Japan’s economy barely grew last quarter, registering an annualized rate of just 0.2%.
“The political turbulence might ease a little after the election, at least temporarily. The yen’s sensitivity to data is increasing,” observed Mohammad Alsarraf, an associate at Danske Bank focusing on forex and fixed income.
On this day, Bank of Japan Governor Kazuo Ueda met with Takaichi for the first time since the elections, discussing economic and financial trends without any particular monetary policy requests from the Prime Minister.
The Bank of Japan’s next interest rate meeting is set for March, with traders estimating a 20% chance of a rate hike. A previous Reuters survey indicated that the central bank might hold off on tightening policy until July.
Last December, the Bank of Japan raised its key policy rate to a 30-year high of 0.75%, yet this is still considerably lower than rates in most major economies, contributing to a continuous decline in the yen’s value. This situation has led to interventions to support the currency in recent years.
Data released on Friday showed that U.S. consumer prices rose less than anticipated in January, which opens the door for the Fed to ease policy further this year.
“The market seems to expect a third rate cut,” stated Kyle Rodda, a senior financial analyst at Capital.com.
According to money market traders, they are anticipating 62 basis points of easing this year, implying two quarter-point cuts and an additional cut of about 50%. The next cut is likely to occur in June, with an 80% chance of a 25 basis point reduction.
The euro decreased by about 0.1% to $1.1854, while the British pound slightly dipped to $1.3638.
The U.S. dollar index, which reflects the dollar’s performance against six major currencies, rose just 0.1% to 97.06 after experiencing a 0.8% drop last week.
Most of the trading activity following the inflation data materialized in the bond market. On Friday, the U.S. two-year Treasury yield, reflecting the Fed’s policy outlook, closed at its lowest point since 2022. The 10-year Treasury yield also dropped by 4.8 basis points. The U.S. bond market is closed today.
The Swiss franc eased slightly to 0.7694 francs per dollar after gaining over 1% last week. Investors remain cautious of potential intervention from the Swiss National Bank to control the strong performance of this safe-haven currency.
The Australian dollar increased by 0.1% to $0.7076, just short of last week’s three-year high of $0.71465, while the New Zealand dollar remained steady at $0.6037 ahead of Wednesday’s Reserve Bank of New Zealand policy meeting, which is expected to keep interest rates unchanged.
