Yen firms on policymaker meeting, US dollar swings after debt deal

CURRENCY markets were choppy on Tuesday (May 30) as the US dollar hit a 10-week high against peers and a six-month top versus the yen before Japanese officials gave their currency a nudge, as investors kept a wary eye on global policy makers.

Japan will closely watch currency market moves and respond “appropriately” as needed, the country’s top currency diplomat said on Tuesday after financial authorities met in response to a weakening in the yen to its softest in six months versus the US dollar.

The yen strengthened on news of the meeting, and held onto those gains, with the US dollar last down 0.2 per cent at 140.16 yen having earlier risen as high as 140.93, its highest since November 2022.

Derek Halpenny, MUFG’s head of research, global markets EMEA said he thought the meeting would not have a major impact, though he said the Japanese currency was coming into focus ahead of a possible election, as Japan is a major energy importer, and subsidies for petrol are nearing their end.

“Maybe it’s the start of some potential increasing concerns (about the currency), obviously we’ve had the debt ceiling agreement, and Tokyo is maybe looking at the markets seeing a reasonable chance the Fed hikes in June and it’s feasible we get US dollar/ yen in mid 140s.”

“If (Prime Minster) Kishida is looking at a snap election, he wants to be seen to be addressing one source of energy inflation which would be currency depreciation.”

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President Joe Biden and Republican House Speaker Kevin McCarthy on Sunday signed off on an agreement to temporarily suspend the US debt ceiling and cap some federal spending in order to prevent a debt default.

That helped the US dollar index, which measures the US currency against six major peers, hit 104.53 in European trading its highest in 10 weeks, though then retreated to 104.02.

The deal is set to face its first test in Congress later on Tuesday.

“It seems to be win-win on almost any scenario for the US dollar right now,” said Jane Foley head of FX strategy at Rabobank.

“Last week the US dollar was gaining on safe-haven demand in case the US defaults, this week you can say the US dollar is gaining because the US isn’t going to default. It tells you there is demand for the US dollar.”

She said attention was turning to whether the US Federal Reserve will hike interest rates again, if not in June then possibly in July.

That, alongside a rethinking of market positioning – people had been dumping a lot of long US dollar positioning since the end of last year – was supporting the US dollar, she said.

The euro was last up 0.28 per cent at US$1.0733, having earlier hit a two-month low, while the pound rose 0.5 per cent to US$1.2426..

Elsewhere, China’s onshore yuan eased to as soft as 7.0995 per US dollar after China’s central bank set the fixing at the yuan’s weakest level since December. The offshore yuan also weakened past a key level of 7.1 per US dollar.

The Turkish lira slipped further and weakened to a record low after President Tayyip Erdogan secured victory in the country’s presidential election on Sunday. REUTERS