The US dollar rose by 0.75% against the Japanese yen at 6:30 a.m. GMT, reaching the level of 158.17, the highest since late last April.
The yen’s declines come as the Bank of Japan talks about its intention to reduce the pace of its purchases of government bonds and maintain short-term interest rates at a range of 0-0.1% as expected.
While the Central Bank will maintain the pace of purchases amounting to the equivalent of $38 billion per month in bonds, while the bank holds more than half of the supply.
The markets had expected the bank to take this step as the beginning of further monetary tightening, but it will decide on the details of this plan at its meeting next July, which may take between one and two years to implement.
This is what led to a decline in Japanese bond yields with the relief that the markets obtained, as the bank will continue to reduce the supply of bonds and lowering the yields, and this is what justifies the yen’s losses today, despite the Bank of Japan’s tendency towards more monetary tightening little by little.
On the other hand, what may prevent the dollar from recording further gains against the yen is the decline in US Treasury bond yields and the narrowing gap in ten-year yields, with more hope for the possibility of achieving a rate cut, at least once, next September or November. Which is likely to be achieved by 69% and 81%, respectively, for both months according to CME FedWatch Tool.
While the rise in weekly initial unemployment claims to the highest level since last August and the unexpected contraction in Producer Price Index (PPI) in May helped strengthen these hypotheses.
On the other hand, as markets await the Federal Reserve’s tendency to reduce the degree of monetary tightening, they expect the Bank of Japan to continue to move towards further tightening, especially with the acceleration of inflation, and this narrative may be reinforced by the PPI reading for May, which came as a major positive surprise to the markets.
On the other hand, the continued weak economic performance and significant investment outflows in foreign bonds – which reached their highest level since 2013 – may prevent this recovery of the yen.
While ten-year US Treasury bond yields are at the lowest levels since last March, at 4.24%. Also, Japanese bond yields continued to decline today on the news, reaching their lowest levels since last May at 0.906%.
