Feb 20 2024: On Tuesday, the dollar experienced a broad uptick, surpassing the 150 yen mark, fueled by mounting expectations of prolonged higher U.S. interest rates. This contrasts with Japan’s economic recession and skepticism in the market regarding a near-term departure from the country’s ultra-loose monetary policy.
China’s significant reduction in its benchmark reference rate for mortgages initially caught traders’ attention. However, the yuan struggled to gain momentum, hovering near a three-month low, as investors expressed the need for more policy support to bolster fragile confidence.
Despite dollar selling from major state-owned Chinese banks to mitigate the yuan’s decline, the onshore yuan remained marginally higher at 7.1982 per dollar, while the offshore yuan was at 7.2089 per dollar.
Dan Wang, chief economist at Hang Seng Bank China, commented on the necessity of the rate cut to alleviate debt burdens and boost market confidence. However, he highlighted the need for sustained policy measures to reverse market expectations fully.
The Australian dollar, often viewed as a proxy for the yuan, and the New Zealand dollar both depreciated in response to China’s move, indicating limited optimism among investors.
In the broader market, the dollar appreciated by 0.2% to reach 150.42 yen, maintaining its position above the key 150 yen threshold for six consecutive sessions. Japanese officials have issued warnings to stabilize the currency amidst this trend.
Last week’s higher-than-expected U.S. producer and consumer prices data led to a recalibration of market expectations regarding Federal Reserve interest rate adjustments, with futures now projecting around 90 basis points worth of cuts in 2024, down from 160 bps previously.
Contrastingly, Japan’s economy, which unexpectedly entered a recession in the final quarter of last year, prompted investors to reassess the likelihood of an imminent departure from the Bank of Japan’s ultra-loose monetary policy.
Rodrigo Catril, senior currency strategist at National Australia Bank (NABZY), noted that Japan’s economic data implies conditions are not favorable for the BOJ to shift away from negative interest rates.
In the euro and sterling markets, both currencies experienced slight declines, with the euro slipping 0.1% to $1.0768 and sterling dipping 0.13% to $1.25795.
The U.S. Treasury yields saw a modest increase following last week’s inflation data and adjustments in Fed expectations. The benchmark 10-year yield reached 4.3009%, while the two-year yield stabilized at 4.6463%.
The dollar index, gauging the greenback against major peers, inched up by 0.08% to 104.37.
In Australia, the Reserve Bank of Australia (RBA) maintained a cautious stance, reinforcing expectations that rate cuts are not imminent. Minutes from the central bank’s February meeting highlighted the need for more evidence of declining inflation before ruling out another interest rate hike.
