Souvenir US$100 and US$50 banknotes.
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The dollar rose on Thursday, helped by expectations of aggressive monetary tightening by the US Federal Reserve, but was a far cry from the previous day’s highs on jitters over what a meeting of finance ministers might say about its rapid appreciation.
The greenback is up 0.36% to 128.335 yen after rising to a two-decade high of 129.430 on Wednesday, as the Bank of Japan (BOJ) entered the bond market for the third time in three months to buy it defending a zero yield target, in stark contrast to the Fed’s increasingly hawkish stance.
The dollar index – which measures the currency against six peers including the yen – rose 0.11% to 100.45 after retreating from a more than two-year high of 101.03 in the previous session.
Benchmark Treasury yields, which allowed the dollar to ease overnight, fell nearly 3% from their highest level since December 2018 as dip buyers emerged. However, those yields also edged higher in Tokyo trading on Thursday.
“Few central banks will match the Fed in policy hikes and balance sheet cuts this year, resulting in a dramatic policy differential in favor of the USD,” Westpac strategists wrote in a note to clients.
The dollar index “should remain bid in this environment, with talk of 101-102 likely to rise near-term,” they said.
San Francisco Fed Chair Mary Daly said on Wednesday she believes the case for a half-point rate hike next month is “complete” and “solid,” adding to recent comments from other Fed officials, which supported larger rate hikes.
Markets are currently priced in for a half point gain in both May and June.
In contrast, the BOJ on Wednesday offered to buy unlimited amounts of 10-year Japanese government bonds for four consecutive sessions as yields pushed against the 0.25% maximum range around its zero percent target, reinforcing its exposure to ultra -easing stimulus settings ahead of next week’s policy meeting shows.
BOJ Governor Haruhiko Kuroda maintains the view that a weak yen is good for the economy overall, but acknowledged earlier this week that the moves have been “quite sharp” and could hurt business plans for Japanese companies.
Finance Minister Shunichi Suzuki was more categorical, saying in his strongest statement yet on Tuesday that the harm to the economy from a weakening yen currently outweighs the benefits.
He is due to meet US Treasury Secretary Janet Yellen on the sidelines of the Group of 20 financial leaders meeting in Washington DC this week, prompting traders to scale back their bearish yen bets on the potential for stronger rhetoric on the currency.
Japanese policymakers “have not yet fully exhausted their verbal intervention tools – the next phase would typically be to describe moves as ‘speculative’ and threaten to take ‘decisive action,'” wrote Adam Cole, chief currency strategist at RBC Capital Markets , in a research note.
“When we get to that point, the bar to the next logical step of physical intervention may be lower than commonly thought.”
But if the intervention would work, he said it could “restore some balance in the markets and manage the pace of JPY depreciation in the short term, (but) longer term there is no prospect of the BOJ reversing all the JPY selling that we expect from Japan when the Fed hike cycle really gets going.”
Elsewhere, the euro slipped 0.11% to $1.08425, while the pound sterling slipped 0.14% to $1.30555.
The Australian dollar was down 0.20% to $0.7436.
The New Zealand dollar fell 0.40% to $0.67755, weighed down by weaker-than-expected consumer price data.