US dollar sinks below 132 yen as traders boost recession bets

THE US dollar declined to its lowest level in more than 6 weeks against the Japanese yen on Monday (Aug 1) as investors ramped up bets that aggressive Federal Reserve (Fed) monetary policy would tip the economy into a recession.

With traditional market gauges of recession such as yield curve spreads pinned near their lowest levels this year, punters have ramped up bets in recent days that US interest rates will peak by the end of 2022.

The US economy shrank for a second straight quarter, data released last week showed, intensifying an ongoing debate over whether the country is, or will soon be, in recession.

Outright 10-year US Treasury yields held near their lowest levels in 4 months on Monday and nearly 12 bps below levels when the Federal Reserve raised interest rates by 75 bps last week.

"With US rates struggling to recover to levels seen prior to last week's Fed meeting, the US dollar started the week in a similar vein to how it traded towards the end of last week," said Simon Harvey, head of FX analysis at Monex Europe.

"That is, the US dollar is exposed to currencies with cheap valuations."

The US dollar sank to its lowest level versus the yen since mid-June below 132 yen, down more than 5 per cent from a late 1998 peak of nearly 140 yen which it hit last month.

With China's official measure of factory activity contracting in July as new virus flare-ups weighed on demand, and German retail sales posting their biggest year-on-year slump since 1994, the sentiment was decidedly cautious in London trading.

A broader index of the US dollar against its rivals weakened 0.6 per cent to 105.30, its lowest level since early July, as traders cut their long US dollar positions, according to latest weekly positioning data.

"Markets are now locking horns with central banks in terms of their efforts to aggressively hikes rates to try and rein in inflation, with markets taking an increasingly confident view that central banks will have to abandon their inflation quest due to looming recession risks," said Marc Ostwald, chief economist at ADM Investor Services.

The yield gap between 10-year US Treasuries and equivalent Japanese debt held near its tightest level in nearly 4 months around 245 bps, denting the US dollar's appeal.

Data at the end of last week tossed the US dollar in both directions, with it rising initially after the personal consumption expenditures price index showed the fastest inflation since 2005, only to sink after the final University of Michigan report - closely watched by Fed policymakers - showed slipping consumer inflation expectations.

The big economic focus for this week will be the monthly US jobs report on Friday.

The euro benefited from the general US dollar weakness, with the single currency rising 0.3 per cent to US$1.0253, continuing its consolidation near the middle of its range over the past week and a half.

The Aussie dollar rose 0.7 per cent to US$0.7042 to a 6-week high before a central bank rate hike on Tuesday, where policymakers are widely expected to lift its cash rate by 50 basis points to 1.85 per cent. That would be the fourth increase since May and the most aggressive tightening in decades. REUTERS