US dollar drives higher, yen tumbles to 1998 lows

THE safe-haven US dollar gained towards new 2-decade highs versus major rival currencies on Monday (Jun 13), supported by fears of a global economic slowdown and bets on steep interest rate hikes by the US Federal Reserve.

The yen was among a host of currencies swept lower on the day, hitting its lowest level versus the dollar since 1998, as the gap between Japanese and US benchmark yields widened after red-hot US inflation data on Friday.

A sell-off across markets saw European stocks fall for a fifth straight session, while Bitcoin tumbled 12 per cent to 18-month lows below US$24,000.

The dollar index - which tracks the greenback against 6 major peers - gained as much as 0.6 per cent versus Friday’s close to 104.84, close to the 2-decade peak of 105.01 hit in May. It was last at 104.75.

Central banks’ efforts to curtail runaway inflation will remain in focus this week.

The Federal Reserve and the Bank of England are expected to raise interest rates at their meetings and there is a chance the Swiss National Bank will do the same.

The Bank of Japan (BOJ) has so far resisted pressure to tighten policy, weakening the country’s currency. The policy divergence has sent the yen down more than 15 per cent against the dollar since early March.

Japan’s top government spokesperson said on Monday that Tokyo stood ready to “respond appropriately” if needed.

The yen fell as much as 0.6 per cent on the day to 135.22 yen per dollar, its lowest since 1998. It was last broadly flat at 134.38 yen per dollar.

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“Everything suggests the BOJ thinks loose policy is still the right policy to pursue. I suspect inflation will have to accelerate a lot more before the BOJ starts getting worried,” said Francesca Fornasari, head of currency solutions at asset manager Insight Investment.

Currency analysts at MUFG said in a note that developments overall suggested further near-term yen weakness. “But market participants will be more wary of the risk of intervention and/or a hawkish shift in BOJ policy in the week ahead,” they added.

The downward pressure on the yen could encourage speculation of a return to yen weakness not seen since the Asian financial crisis in 1997, when it hit 140.00 - the last time Japan directly intervened to support the currency, the note added.

The euro, sterling and the Swiss franc all fell to around 4-week lows versus the dollar on the day.

The euro slipped as much as 0.6 per cent to US$1.04520.

Sterling fell 1 per cent to US$1.21920, after data showed Britain’s economy unexpectedly shrank in April.

The Swiss franc dropped as much as 0.7 per cent to 0.99440 franc per dollar.