TOKYO (BLOOMBERG, REUTERS) - The US dollar rose to a fresh two-year high on Tuesday (April 19) after Federal Reserve Bank of St Louis president James Bullard said the central bank should not rule out rate increases of 75 basis points.
The dollar index, a gauge of the greenback’s value against six major currencies, was up at 100.88 after surging to 100.86 on Monday, the highest since April 2020.
The yen, meanwhile, extended its longest losing streak in at least half a century as comments by Mr Bullard reinforced investor views that the gap between United States and Japanese interest rates will widen further. The Japanese currency slid for a 13th day against the dollar, the longest run of losses in Bloomberg data starting in 1971.
The US rate futures market has priced in a 96 per cent chance of a 50-basis point tightening at next month’s Fed policy meeting, and about 215 basis points in cumulative rate increases in 2022, providing ample support for the dollar.
“There is indeed history that when the Fed plans for hiking and tightening, the buck ends up losing during those cycles. But at the moment, there is little in optimism out there that can knock the buck down,” said Mr Juan Perez, director of FX trading at Monex USA in Washington.
The yen extended its drop against the dollar to a new 20-year low even as Japanese Finance Minister Shunichi Suzuki stepped up his rhetoric.
“We are monitoring moves in the foreign exchange market with a strong sense of vigilance,” Mr Suzuki said on Tuesday.
Bank of Japan (BOJ) governor Haruhiko Kuroda on Monday also ramped up his warnings on sharp yen moves while sticking with his commitment to keep stimulating a fragile economy.
“Unless Japan’s policy - monetary policy and policy related to currency - is realigned, verbal or physical interventions won’t be effective,” said Mr Yuji Kameoka, chief FX strategist at Daiwa Asset Management in Tokyo.
Japan last intervened to sell dollars and buy yen in June 1998 at the height of the Asian currency crisis. Japan has traditionally intervened to weaken the yen as a huge current account surplus exerted upward pressure on the yen. Japan has not stepped into markets since November 2011.
“Until the BOJ changes its ultra-dovish stance, the monetary policy divergence argues for continued yen weakness and intervention would likely have little lasting impact,” said Mr Win Thin, global head of currency strategy at Brown Brothers Harriman.
The yen dropped as much as 0.8 per cent on Tuesday to 127.97 per dollar, the weakest level since May 2002. It has slumped more than 4 per cent since its current run of losses began on April 1.
Mr Kuroda is facing a balancing act as he tries to ensure that cracks do not emerge between the government and the central bank on the need to continue with monetary stimulus. While a weak yen is a positive for the economy, a rapid drop can disrupt corporate planning and bears close watching, he said.
The drop comes as the BOJ keeps local yields anchored to the floor, while their US equivalents surge on expectations for aggressive Fed hikes. The emerging consensus among traders in Tokyo is that it will reach 130 against the dollar in the coming months.
Asset managers boosted bearish wagers to a record last week, while leveraged fund net-short positions were just off the highest in more than three years, data from the Commodity Futures Trading Commission shows.