Attention: Yen Weakens as Focus Shifts to Fed Meeting
The yen is showing signs of vulnerability, nearing its lowest point against the euro in 15 years and hitting a one-year low against the dollar on Wednesday, November 1st. This decline comes as speculation grows that Japan’s policy adjustments for yield curve control may not be sufficient to close the significant interest rate gap that has weighed down the currency for years.
The initial movements in Asian trading were not too significant as the market awaited the Federal Reserve’s meeting today. Market expectations are that interest rates will remain unchanged, and there’s also anticipation regarding the release of the US Department of the Treasury’s fund details.
Against the dollar, the yen weakened by approximately 1.7% overnight, reaching a low of 151.74, slightly different from the 151.94 level that triggered interventions last year. The yen has breached 160 against the euro for the first time since 2008.
The latest exchange rate stands at 151.27 per dollar, marking a 13% decline for the year and a 38% drop from the pandemic peak. Against the euro, it stands at 160.05.
Intervention remains a top concern for investors, with prominent Japanese currency diplomats noting on Wednesday that recent actions seem to be speculative, and authorities remain “on alert” to take action.
The Bank of Japan raised its inflation forecast on Tuesday but refrained from increasing policy interest rates. They redefined the 1% threshold on 10-year government bond yields as a reference rate rather than a strict limit, effectively ending the strict yield curve control policy.
Data from the Ministry of Finance also indicates that Japan did not intervene in the foreign exchange market until October.
In this context, the dollar benefits from a favorable comparison between the US and other major economies. Data on Tuesday showed slightly weaker growth in Europe than expected and a surprising decline in manufacturing activity in China.
In the US, data revealed strong wage and salary growth in the last quarter, and despite a drop in consumer confidence, the figures were significantly smaller than market expectations. The euro declined by 0.4% against the dollar last night and maintained losses at $1.0579.
The US Dollar Index, measuring the greenback against a basket of major currencies, rose 0.5% on Tuesday, reaching 106.66. The pound remained steady at $1.2150. Offshore yuan in China held at 7.34 per dollar amid domestic liquidity crises, driving overnight repo rates as high as 50% as banks scrambled for month-end cash.
China’s Caixin Manufacturing PMI data will be in focus today, ahead of private manufacturing wage figures and the Federal Reserve meeting.
US yields increased at the start of Asian trading, while Japanese yields slightly decreased due to thin volume, resulting in a 398 bps gap between the 10-year benchmark rates. This number is smaller than the 414 bps achieved in October. (Arl) Source: Reuters
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