June 21 2024: The dollar reached an eight-week high above 159 yen on Friday and hit its highest level in nearly five weeks against sterling. The Federal Reserve’s patient approach to cutting interest rates contrasts with more dovish stances elsewhere, contributing to the dollar’s strength.
The dollar index, which measures the currency against six others, surged 0.41% overnight, erasing weekly declines, following a second consecutive rate cut by the Swiss National Bank and hints from the Bank of England about a reduction in August.
Yen Under Pressure
The yen remained under pressure after the Bank of Japan’s decision last week to delay reducing bond-buying stimulus until its July meeting. “Traders punished the yen with renewed enthusiasm,” driving it past the closely watched 159 per dollar level on Friday, said Tony Sycamore, a market analyst at IG.
Japan’s finance ministry intervened to support the yen, spending approximately 9.8 trillion yen ($61.64 billion) to lift the currency from a 34-year low of 160.245 per dollar, reached on April 29. The U.S. Treasury added Japan to a list of countries it is monitoring for potential labeling as a currency manipulator. This list also includes China.
Despite these measures, Japan’s top currency diplomat, Masato Kanda, stated on Friday that Tokyo is prepared to take further “resolute” action against “speculative, excessive volatility.”
“The market is getting jittery once again, evident in today’s sell-off. This isn’t about market fundamentals but about nervousness at these levels,” said City Index market strategist Fiona Cincotta. She added that the concern is about the timing of potential Japanese intervention.
Dollar Index and Sterling Performance
The dollar index was up 0.2% at 105.79, aiming for a flat finish to the week following two consecutive weeks of gains. Sterling dipped to $1.2637, around its lowest level since mid-May. The BoE kept rates on hold this week, with some policymakers describing the decision as “finely balanced.”
UK retail sales data showed a stronger-than-expected rise in May due to milder weather. However, a separate report indicated that British business growth slowed to a seven-month low in June, affected by concerns over the upcoming July 4 general election.
Euro Performance
The euro eased 0.1% to $1.0686 after preliminary surveys for June indicated that service sector activity in France contracted this month, while activity across the German economy slowed.
Federal Reserve Policy
Fed officials left policy unchanged at their June meeting, reducing previous projections for three quarter-point cuts this year to one. Despite cooling inflation and an easing labor market, the resilience of the U.S. economy has given the Federal Reserve a unique position to employ higher interest rates to combat inflation more swiftly.
“The resilience of the U.S. economy has afforded the Federal Reserve a unique position, enabling the U.S. central bank to employ higher interest rates as a tool to combat inflation more swiftly than it otherwise could,” said James Kniveton, senior corporate FX dealer at Convera. “With other major central banks adopting more dovish stances, this has the potential to continue to bolster the dollar over the short to medium term.”
($1 = 158.9900 yen)
