Yen hits key 135 level amid Bank of Japan's increasingly isolated policy

The currency touched 135.00 to extend a 20-year low. PHOTO: AFP

TOKYO (BLOOMBERG) - The yen dropped to the key psychological level of 135 per dollar on Monday (June 13) as Japan's easy monetary policy increasingly stands at odds with developed peers hiking rates.

The currency touched 135 to extend a 20-year low as Treasury yields extended Friday's inflation-shock-driven gains. It has tumbled almost 15 per cent this year - the worst-performing major currency - as the Bank of Japan keeps rates anchored to boost a sluggish economy, while United States yields surge on bets for continued Federal Reserve hikes.

Friday's shock, higher-than-expected US inflation print has heaped pressure on the Fed to intensify monetary tightening, boosting the dollar. Before it hit, senior Japanese officials delivered a ramped-up warning on the yen's decline, putting their concern in a written statement for the first time as they seek to keep a floor under the currency.

The weakening yen is expected to have a mixed impact on the domestic economy, hurting household budgets but providing a boost to exports.

A further slide would increase pressure on neighbouring Asian economies, which are losing out in export competitiveness.

"Markets appear to be pricing in further aggressive rate hikes, with some seeing the Fed raising 75 basis points in June, as it may be more concerned about inflation with longer-term expectations staying elevated," said Resona Holdings chief strategist Shinsuke Kajita in Tokyo.

The dollar-yen "may eye the 2002 high of 135.15" as market players in Asia take in last Friday's US consumer price index data and expectations ahead of the Federal Open Market Committee meeting this week.

The yen has also been pressured lower versus other developed peers.

It slid to a seven-year low against the euro and the Australian dollar earlier this month after the Reserve Bank of Australia's bigger-than-forecast rate hike and plans from the European Central Bank to kick off monetary tightening.

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