Dollar holds steady, Yen vulnerable after Fed remarks dampen rate cut expectations

Steady Dollar, Low Yen: The Dollar remained largely stable on Wednesday, keeping the yen near its lowest levels in 34 years following remarks from Federal Reserve officials, including Chair Jerome Powell, indicating that US interest rates are likely to remain elevated for an extended period.

Key figures at the US central bank, including Powell, refrained from providing any indication of when interest rates might be reduced, asserting instead that monetary policy should remain restrictive for a longer duration, dashing hopes amongst investors for significant easing within the year.

"Given the current strength of the labour market and progress on inflation thus far, it is prudent to allow restrictive monetary policy more time to take effect and to let data and the evolving outlook guide our decisions," Powell stated at a forum in Washington.

Currency basket levels

The Dollar maintained its stability, with the euro trading at $1.062 in Asian trading hours, not far from its recent low of $1.06013 reached on Tuesday. Against a basket of currencies, the Dollar stood at 106.33, slightly below its five-month peak of 106.51 touched the previous day.

Powell's remarks further diminished any remaining expectations of imminent rate cuts by the Fed, with markets now pricing in September as the likely starting point for easing, as opposed to June.

Traders are currently anticipating a total of 41 basis points in cuts for 2024, a significant decrease from the 160 basis points of easing that were priced in at the beginning of the year.

"Powell and other Fed officials are maintaining the stance that rate cuts have been postponed rather than discarded, which continues to reassure investors," noted Ben Bennett, APAC investment strategist at Legal And General Investment Management.

“The possibility of additional rate hikes being suggested could potentially trigger a repeat of the market turbulence seen last October. I'm closely monitoring the strength of the dollar and U.S. real yields.”

Treasury yield increase

The resurgence of the narrative favouring higher US rates for an extended period has contributed to an uptick in yields, with the benchmark 10-year Treasury yield climbing to a five-month high of 4.696 per cent on Tuesday. In Asian trading hours, the yield on 10-year Treasury notes stood at 4.672 per cent.

The yen, which is highly sensitive to US yields, has remained at levels last observed in 1990, edging closer to the 155 per dollar mark that traders fear could prompt intervention by Japanese authorities.

On Wednesday, the yen was trading at 154.65 per dollar, having touched a 34-year low of 154.79 in the previous session. The Japanese currency has depreciated by about 9 per cent against the dollar so far this year.

"I believe that the dollar/yen pair will soon surpass the 155 level," remarked Kieran Williams, head of Asia FX at InTouch Capital Markets.

"While there has been an increase in verbal interventions from Japanese officials as the dollar/yen exchange rate has risen since last week's US CPI release, the rhetoric has focused more on the speed of the movement rather than specific levels."

Japan last intervened in the currency market in 2022, reportedly spending around $60 billion to defend the yen.

Yield impact analysis

Williams from InTouch Capital suggested that under current conditions, it would likely require more than $60 billion to have a lasting impact, especially with US two-year yields increasing by approximately 36 basis points since the beginning of April.

In other currency markets, the pound was trading at $1.2425, up 0.01 per cent for the day but still near its five-month low of $1.24055 reached on Tuesday.

The Australian Dollar rose by 0.12 per cent to $0.641, while the New Zealand Dollar climbed by 0.22 per cent to $0.589. Data indicated that New Zealand's consumer prices matched forecasts in the first quarter, but domestically driven inflation remained surprisingly robust, prompting markets to postpone expectations of interest rate cuts.

(With Reuters Inputs)