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Currency Speculations Drive Euro and Pound Performance Against Weakening Yen

Yen weakens against major currencies amid speculation of Fed rate cuts, impacting global markets and central bank policies.

By Athena Xu

4/3, 14:10 EDT
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Key Takeaway

  • Euro and pound set for best performance in two weeks against yen, driven by U.S. Fed rate cut expectations.
  • BOJ's interest rate policies contribute to yen's -8.1% return against the dollar, impacting global stock markets.
  • Speculations on BOE and ECB rate cuts create a precarious stability for euro and pound against weakening yen.

Yen's Performance in Focus

The Japanese yen has been under the spotlight due to its performance against major currencies, particularly the euro, pound, and Swiss franc. Recent trends indicate these currencies are on track for their best day in two weeks against the yen. This movement is partly attributed to expectations around the U.S. Federal Reserve's potential shift towards rate cuts, as indicated by easing price pressures in U.S. services data. The euro-yen cross, in particular, has seen increased buying activity, suggesting more room for growth, especially with the onset of the new fiscal year in Japan, which traditionally sees Japanese accounts distributing cash overseas.

Masato Kanda, Japan's top currency official, commented on the yen's weakening as speculative and not fundamentally driven, despite the currency's -8.1% return against the dollar this year. This performance is largely due to the Bank of Japan's (BOJ) interest rate policies, which have created a negative carry for investors holding long positions in yen.

Sterling and Euro Stability Amid Central Bank Speculations

The British pound and the euro have managed to maintain relative stability against the backdrop of the yen's struggles. However, this stability is precarious, with market expectations for interest rate cuts by the Bank of England (BOE) and the European Central Bank (ECB) potentially being overly optimistic. The BOE faces the challenge of cooling services inflation, which remains stubbornly high, while the ECB has hinted at a possible rate cut in June, with further reductions anticipated by year-end. These developments place the euro in a vulnerable position against the yen, especially as central bank decisions draw closer.

Impact of Currency Movements on Global Markets

Currency movements have significantly influenced global markets, with the weakening yen impacting stock markets, particularly in Asia. The yen's depreciation to its weakest level since 1990 has favored Japanese exporters, contributing to a rise in Japanese stocks. Conversely, the strength of the dollar against major currencies has been a defining feature of recent trading sessions, with mixed performances in Asian equities. Chinese tech stocks, for example, have faced downward pressure, contrasting with positive trends in European markets, where the Stoxx 600 index has continued to gain.