Ahead of the Bank of Japan's meeting, the yen has plummeted to a 34-year low against the U.S. dollar, driven by significant yield disparities and shifting investor preferences.
The Japanese yen has reached a 34-year low against the U.S. dollar and has hit decade lows against other major currencies. This significant drop comes just before a Bank of Japan meeting, where it is widely anticipated that interest rates will remain on hold. Meanwhile, the U.S. dollar has experienced a dip due to softer-than-expected U.S. economic growth data.
In the first quarter, the U.S. economy grew at an annualized rate of 1.6%, the slowest pace in nearly two years, falling short of economist predictions of 2.4%. This news has given a slight boost to the euro, which rose 0.3% overnight, reaching a two-week high of $1.0728.
The Australian dollar has also seen an increase, spurred by a higher-than-anticipated inflation reading earlier this week. It briefly surpassed its 200-day moving average, touching $0.6539, before settling down to $0.6522 in Friday's Asia trade.
Conversely, the yen has weakened significantly, falling to its lowest since 1990 at 155.75 per dollar. This is largely attributed to a sharp rise in U.S. yields, with a notable surge in inflation measures. With U.S. rate cut expectations now dissipating, the market is pricing in only a 34-basis point reduction in 2024. The widening yield gap between the U.S. and Japan, now at 380 basis points for the 10-year tenor, has encouraged short yen positions and prompted Japanese investors to gravitate towards dollar assets, such as Treasuries, further pressuring the yen.
Despite passing levels where traders expected possible intervention from officials, the yen was last trading at 155.58 per dollar. The yen also hit near 16-year and nine-and-a-half year lows against the euro and the Australian dollar, respectively. Although the Bank of Japan raised rates in a landmark meeting in March, market expectations for any new policy adjustments remain low.
Nathan Swami, Citi's Asia-Pacific head of FX trading in Singapore, commented, "The market is not pricing in much from this meeting but it's important to watch where they set official inflation targets, and whether they revise their forecast. I'm expecting them to, which then opens up the summer meetings as live."
Other currencies such as Sterling rose 0.4% overnight, trading last at $1.2507. The New Zealand dollar has also firmed slightly in Asia morning trade at $0.5960, marking gains in the previous four sessions.
As the Bank of Japan’s meeting approaches, financial markets are poised to see whether Japanese monetary policy will hold steady or adapt in the face of persistent inflationary pressures and a rapidly weakening yen.
