Dollar rises to a 38-year high against yen

The US dollar traded higher against all its major counterparts on Wednesday, gaining the most ground against the Japanese yen. Today, the greenback is stabilizing or pulling back.

With no major events on yesterday’s agenda to drive the dollar, it seems that traders continued to digest hawkish remarks by Fed policymakers. On Tuesday, Fed Governor Michelle Bowman reiterated the view that holding interest rates steady “for some time” may be enough to tame inflation, while Governor Lisa Cook noted that lowering borrowing costs will be appropriate “at some point”, remaining vague about the timing of the first reduction.

Fed Governors are permanent rate setters and that’s maybe why their remarks are taken seriously by the investment community. Indeed, although the number of basis points worth of rate cuts by the end of the year remained at around 45, the probability of a first reduction in September eased to around 68%.

Attention will now turn back to economic releases and tomorrow’s core PCE price index for May, which is the Fed’s favorite inflation metric. The forecast is for a slowdown, which is supported by the slide in the core CPI rate for the month. This could prompt traders to re-increase their September cut bets and thereby result in a pullback in the US dollar.

The yen was the main loser, even as Japan’s 10-year government bond (JGB) yield edged north. Dollar/yen emerged above the round number of 160, whose breach triggered two intervention episodes around two months ago, with the pair hitting its highest level since December 1986.

Considering that the Summary of Opinions from the latest BoJ gathering increased speculation for a July hike, a still-tumbling yen appears to be a strange development. Perhaps investors are still attracted by dollar-based assets, trying to take advantage of interest rates at 5.25-5.5% before the Fed starts lowering them. US rates are much higher than the BoJ’s short-term rates, which rest within the 0-0.1% range.

Be that as it may, the yen’s retreat sparked fresh intervention warnings, with Japan’s top currency diplomat Masato Kanda saying that they are “seriously concerned and on high alert”. With that in mind, dollar/yen traders may liquidate some of their positions in fear of another round of intervention, thereby allowing the pair to pull back below 160 in the following days, even though the broader trend remains positive. Indeed, the pair is already pulling back today and a slowdown in tomorrow’s US core PCE price index could extend the retreat.

All three of Wall Street’s main indices ended Wednesday’s session in the green, with the tech-heavy Nasdaq gaining the most. Although both the Nasdaq and the S&P 500 are still hovering below their record highs, it may be a matter of time before they surpass them.

The latest rebound in Nvidia’s stock suggests that investors remain willing to continue pricing growth opportunities related to artificial intelligence (AI), while as far as US interest rates are concerned, delayed reductions by a couple of months may not be much of a concern for equity traders, as long as the expected direction remains the same.