Aug 5 2024: The Japanese yen surged to its highest level against the dollar since January on Monday, driven by market reactions to recent weak U.S. labor data that heightened recession fears and expectations for more aggressive Federal Reserve rate cuts.
Friday’s disappointing jobs report, coupled with a series of weak earnings from major tech firms and growing concerns over the Chinese economy, sparked a global sell-off in stock markets, oil, and high-yield currencies as investors sought safer assets.
The sell-off continued on Monday, with U.S. Treasury yields dropping further, stock indexes declining, bitcoin plummeting, and the dollar weakening—particularly against the yen.
The yen, a favored carry-funding currency, strengthened by as much as 3.4% to 141.675 per dollar at one point before easing to 143.165. The currency was trading close to its strongest level since early January.
The dollar fell by 0.5% against major currencies, trading at 102.62—a near five-month low.
“Concerns about a U.S. recession mean the market is no longer anticipating a gradual adjustment in Fed policy toward a neutral rate—around 3.25%. Instead, recession fears are introducing expectations for stimulative monetary policy,” observed Chris Turner, head of FX strategy at ING.
“It’s no surprise to see low-yielding currencies gaining strength as global interest rates converge at lower levels.”
The yen has appreciated by 14% against the dollar over the past three weeks, partly due to the Bank of Japan’s recent 15-basis point rate increase to 0.25%, along with its announcement to cut monthly bond purchases by half over the next few years. Barclays analysts noted that the yen is now the most overbought among G10 currencies, suggesting that further gains in the near term might be challenging.
The Swiss franc, another popular funding currency, rose more than 1% to 0.84825 against the dollar and also reached a seven-month high.
High-yielding currencies like the Indian rupee and Mexican peso fell, while previously favored funding currencies like the yen and China’s yuan experienced strong rallies.
Treasury yields have sharply declined since last week when the Federal Reserve maintained the policy rate at 5.25% to 5.50% but hinted at a potential rate cut in September. By Friday, after data showed a rise in the unemployment rate, recession concerns intensified, deepening expectations for rate cuts.
Yields on 10-year U.S. Treasuries dropped nearly 40 basis points last week—the largest weekly decline since March 2020—and were last at 3.75%.
Fed fund futures indicated a nearly 99% probability of a 50 basis point rate cut at the Fed’s September meeting, with futures implying a total of 127 basis points in cuts for the year.
The euro rose by 0.2% to $1.0954 despite increasing expectations for rate cuts from the European Central Bank (ECB). Traders now anticipate over 90 basis points of ECB rate cuts this year, up from 50 bps at the start of last week.
Markets are also grappling with the risk of military escalation in the Middle East following recent developments in the Israel-Hamas conflict, which have driven oil prices to their lowest levels since January. The U.S. military is deploying additional forces in the Middle East and Europe in response to threats from Iran, Hamas, and Hezbollah after the killing of Hamas leader Ismail Haniyeh in Tehran last week.