Yen jumps and greenback slips as traders eye interest rate tweaks

THE yen rallied against the US dollar for a fourth straight session on Tuesday (Nov 21) as investors positioned for the possibility that the Bank of Japan will tighten monetary policy next year while the US Federal Reserve loosens.

Also weighing on the US dollar and boosting the yen was a rally in China’s yuan, which rose to an almost four-month high.

The US dollar hit its lowest level since mid-September at 147.16 yen, and was last down 0.53 per cent at 147.6.

More broadly, the US dollar index, a gauge of the greenback against six other currencies, fell to its lowest since late August at 103.17 and was last 0.13 per cent weaker at 103.32.

“There has been a lot of excitement, momentum is building, about the ability of the Bank of Japan to exit its ultra-loose monetary policy... possibly next year, ending negative interest rates,” said Jane Foley, head of FX strategy at Rabobank.

Foley said a sharp drop in the US dollar was also encouraging investors to unwind some of their bets against the yen. “The US dollar is weaker, and this I think is just the catalyst for the market making bets on how far US dollar-yen can really move,” she said.

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China’s yuan hit an almost four-month high of 7.13 per US dollar and was last at 7.138.

The People’s Bank of China set the midpoint of the yuan’s trading band at its strongest since Aug 7.

“We think the sizable rally in the Chinese yuan is the primary driver of the stronger yen this week as it is lifting (Asian) FX as a whole,” said Simon Harvey, head of FX analysis at Monex Europe.

The euro rose to its highest since mid-August at US$1.0966 on Tuesday, and was last slightly higher at US$1.0944.

Sterling was up 0.26 per cent at US$1.2538, after hitting a two-month high of US$1.2554. Bank of England governor Andrew Bailey on Monday said it was “far too early to be thinking about rate cuts” in Britain.

US Treasury yields have tumbled as investors have wagered that the Federal Reserve will cut interest rates next year, after a slowdown in US inflation in October.

That has dragged the US dollar index down from an almost one-year high at the start of October, when US economic data was consistently beating expectations.

The 10-year US Treasury yield was on track to fall for a fourth session running on Tuesday to 4.39 per cent, after dipping on Monday in the wake of a solid auction of 20-year bonds. It hit a 16-year high above 5 per cent in October.

Elisabet Kopelman, US economist at lender SEB, said: “Strong risk appetite and speculation about future interest rate cuts are not a good environment for the US dollar.”

Minutes from the Fed’s last meeting are due at 7 pm GMT and headline the day ahead, along with a speech from European Central Bank President Christine Lagarde.

Some analysts caution that the US dollar’s downward momentum may not have too much further to run. “There is a risk that we are going to get pushback about the pace of Fed easing,” said Foley. REUTERS