Yen slides to two-decade low as interest rate gap widens

The currency has also suffered from Japan's position as an energy importer, at a time of rising oil prices. PHOTO: AFP

TOKYO (BLOOMBERG) - The yen fell to a 20-year low against the dollar, weighed down by the widening gap between yields in Japan and the United States as the Federal Reserve pushes interest rates higher.

The currency fell as much as 0.9 per cent on Monday (June 6) to 132.01 per dollar - the lowest since April 2002 - as benchmark Treasury yields climbed past the closely watched 3 per cent level. It traded at 131.97 per dollar at 7.20am in Tokyo on Tuesday.

With yields on local benchmark bonds capped at 0.25 per cent by the Bank of Japan, the yen has also weakened against other currency peers. It slid to a seven-year low against the euro, with the European Central Bank set to lay the ground for interest rate hikes at this week's meeting.

The fresh declines open up the door for a move towards 135 per dollar, according to analysts.

"The weakening trend in the yen has reasserted itself," Dr Win Thin, global head of currency strategy at Brown Brothers Harriman, wrote in a note. "We maintain our longstanding target of the January 2002 high near 135.15."

The yen has been under pressure this year as the dovish Bank of Japan keeps local yields anchored in a bid to boost a moribund economy, while US equivalents surge on rising interest rate expectations.

The currency has also suffered from Japan's position as an energy importer at a time of rising oil prices.

In a speech on Monday, Bank of Japan governor Haruhiko Kuroda affirmed that policy tightening still still not on the table, indicating that the economy still needs more time to recover as the country lacks enough wage growth.

"In this situation, monetary tightening is not at all a suitable measure," he said, suggesting that the bank focus instead on bolstering economic activity.

As a result, the divergence between the dollar and the yen is not likely to reverse course any time soon, according to Wells Fargo strategist Brendan McKenna.

"We expect the Fed to keep hiking and for the Bank of Japan to keep rates on hold for the foreseeable future," he said. "As long as those dynamics are present, the yen should keep weakening."

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