The Yen plunges to its weakest
- On Monday, the yen dropped to a fresh 34-year low, slipping below 160 per dollar, as a stronger-than-expected US inflation report diminished prospects for US interest rate reductions this year. During morning trading, the dollar was trading at 160.17 yen, marking its lowest level since 1990. This sparked speculation that Japanese authorities might intervene to bolster their currency. The robust reading of the personal consumption expenditures (PCE) index on Friday followed the Bank of Japan’s decision last week to refrain from further tightening its monetary policy.
However, observers expressed doubt that a potential intervention, the first since late 2022, would significantly impact the situation. “Expectations regarding the effectiveness of intervention over the long term may fall short, as the macroeconomic fundamentals do not align with an abrupt shift towards a hawkish monetary stance,” stated Tapas Strickland from the National Australia Bank. The uptick in the US PCE index followed a consecutive third rise in the consumer price index.
This, coupled with resistance from decision-makers at the US Federal Reserve cautioning against premature cuts, has prompted investors to reassess their expectations for the number of rate reductions this year. Initially anticipating as many as six cuts at the beginning of 2024, they now anticipate just one. The Fed’s upcoming policy announcement this week will be closely scrutinized for updated guidance on officials’ monetary policy intentions. Friday’s decision to maintain the benchmark rate between zero and 0.1 percent was highly anticipated, with the bank affirming that “supportive financial conditions will remain in place for the foreseeable future.”
Despite the cautious stance of the Bank of Japan (BoJ) towards additional policy tightening and the uncertain rate outlook, any significant appreciation of the JPY remains elusive. On the contrary, the Federal Reserve (Fed) is anticipated to postpone interest rate cuts due to persistent inflation pressures, reinforced by Friday’s publication of the Personal Consumption Expenditures (PCE) Price Index. Consequently, the substantial interest rate differential between the US and Japan is expected to persist for the foreseeable future. Coupled with an overall positive risk sentiment, this dynamic should limit the strength of the JPY.
