Dollar Strengthens as U.S. Yields Rise

SINGAPORE (Reuters) - On Monday, the Japanese yen reached its lowest point in five months against the U.S. dollar, which is experiencing support due to climbing U.S. yields. This situation is compounded by lower liquidity as the end of the year approaches, keeping most currencies within narrow ranges.

The yen was trading at 157.82, with only the possibility of Japanese government intervention preventing it from testing the 160 threshold, a level that hasn't been seen since July. The dollar's strength is notable, as reflected in its position against major currencies, remaining steady at 107.99.

The euro was recorded at $1.0429, hovering near recent lows, and appears to be moving cautiously during the holiday trading period. Forecasts suggest that the euro could end the calendar year with a decrease of approximately 5.5% against the dollar.

The rise in U.S. Treasury yields has provided a significant boost to the dollar. The benchmark 10-year note reached a peak not seen in over seven months last week, stabilizing at around 4.625% on Monday.

Despite numerous analysts predicting a weaker dollar in 2024, the U.S. dollar is poised to finish the year stronger against all major currencies, as noted by Chris Weston, head of research at Australian online broker Pepperstone.

So far this month, the dollar index has increased by 2.3%, contributing to a year-to-date rise of 6.6%. This dollar strength is attributed to the anticipated economic policies of President-elect Donald Trump. These policies include looser regulations, tax reductions, increased tariffs, and stricter immigration controls, which are expected to stimulate growth and drive inflation, thereby supporting higher U.S. yields.

Since December 3, the dollar has risen by 10 yen, significantly influenced by the Federal Reserve's cautious message regarding potential future rate cuts communicated on December 18. This outlook has pressed down the value of the yen, which fell to its lowest level since July 17 last week, trading at 158.09 per dollar and marking a decline of 10.6% since the beginning of the year.

However, the yen showed some recovery after a summary from the Bank of Japan’s (BOJ) December policy meeting revealed an increasing confidence among some policymakers regarding an upcoming rate increase. Additionally, the BOJ reduced its monthly bond purchases.

Despite this, Japanese yields remain considerably low, and recent statements have raised questions about the BOJ's commitment to increasing rates. The central bank maintained its interest rates at 0.25% in this month's meeting, with Governor Kazuo Ueda indicating that further scrutiny of data on wage trends for the upcoming year, along with clarity on U.S. economic policies, is required.

A recent poll conducted by Reuters suggested that the BOJ might raise rates to 0.50% by the end of March, but the market is pricing in only a 42% likelihood of a rate hike in January.

Traders are closely monitoring for any intervention from Japanese officials to stabilize the currency if it continues to decline, which has occurred multiple times throughout the year. Japan's Finance Minister Katsunobu Kato reiterated concerns about the falling yen, warning against excessive fluctuations.

According to Weston from Pepperstone, buyers of the dollar have been dominant in trading against the yen. "It’s usually uncomfortable to buy into a market reaching new highs, but I believe any break above 158.00 is a solid opportunity - although short positions in the yen carry the growing risk of credible intervention from the Ministry of Finance," Weston stated in a client note.

Aside from the yen's activities, major currency movements last week were relatively minimal. The yen dipped by 0.9%, the euro slid by 0.2%, while sterling edged up by 0.1%, and the dollar index advanced by 0.2%.

The European Central Bank (ECB) may delay its next rate cut owing to a recent spike in inflation, as remarked by ECB Governing Council member Robert Holzmann on Saturday.

In the cryptocurrency space, Bitcoin showed little action at around $93,052, reflecting a decline of about 4% this month, following a significant pullback from its record high of $108,379.28 achieved on December 17. However, Bitcoin has seen an impressive increase of approximately 115% so far this year.

Dollar, Yields, Market