U.S. dollar hits 34-year peak against yen as global tensions and rate expectations escalate

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15th April 2024 – (Tokyo) The U.S. dollar maintained its robust stance on Monday, preserving its most substantial weekly surge since 2022, as geopolitical tensions in the Middle East and expectations of enduring high U.S. interest rates bolstered its appeal.

Last week, the dollar ascended by 1.6% against a basket of six major currencies following an unexpected rise in U.S. inflation. The uptick in the Consumer Price Index dampened hopes for imminent US rate cuts, contrasting with signals from European policymakers who hinted at potential rate reductions within the coming months. The dollar soared to a 34-year peak against the Japanese yen, reaching 153.69, and hit a five-month high against the euro on Friday, buying €1.0646 in early trading in Asia.

The currency’s strength appears more influenced by the recalibrated expectations for US Federal Reserve policy than by the recent Iranian attack on Israel, which triggered declines in stock markets, Bitcoin, and oil prices. Over the weekend, Iran executed a retaliatory strike using drones and missiles, responding to what it claimed was an Israeli assault on its consulate in Damascus. The attack, which resulted in minimal damage, was declared by Iran as a closure of the incident.

Despite the ominous nature of the conflict, senior Israeli officials indicated that immediate retaliation was unlikely, suggesting a cautious approach to escalation. The financial markets remained watchful, gauging the potential for a broader regional conflict.

Jason Wong, a senior market strategist at BNZ in Wellington, remarked, “It was really a symbolic attack over the weekend… never really designed to inflict much damage. It’s now over to what Israel’s response will be.”

In response to last Wednesday’s higher-than-anticipated inflation data, investors have adjusted their expectations, postponing the anticipated start of the Fed’s easing cycle to September. Nicholas Chia, an Asia macro strategist at Standard Chartered Bank, noted, “It is a data-light week, so all eyes will turn to Fedspeak where more than a dozen voting members on the FOMC are likely to emphasise patience after last week’s blowout CPI print.”

As tensions continue to escalate in the Middle East, the demand for safe-haven assets is expected to rise. Meanwhile, the two-year Treasury yield briefly surpassed 5% last Thursday, underscoring the heightened risk environment. The euro and sterling recorded their most significant weekly drops since late September 2022 and mid-July, respectively. In contrast, the Chinese yuan’s trade-weighted index reached a peak, indicating a loss in competitive edge amidst the global currency fluctuations. Bitcoin, after a sharp fall below $62,000 on Sunday, has slightly recovered, trading at around $65,343.