Yen Rises 0.8% vs Dollar, Fed Cut Bets Fuel Rally

Yen appreciates as US inflation data fuels speculation of a dovish Fed shift, reducing intervention concerns.

By Athena Xu

5/16, 01:41 EDT
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Key Takeaway

  • Yen strengthens as US inflation data fuels bets on Fed easing, moving away from intervention zones with a 0.8% rise against the dollar.
  • Suspected interventions by Japanese authorities become less likely as the yen gains, driven primarily by US economic indicators and policy expectations.
  • The gap between US and Japanese bond yields narrows, supporting the yen's strength amid speculation of BOJ rate adjustments.

Yen Strengthens Amid US Inflation Data

The Japanese yen has shown a notable appreciation against the dollar, buoyed by the latest US inflation data which hinted at easing inflation pressures. This development has led to increased speculation that the Federal Reserve might adopt a more dovish monetary policy stance within the year. The yen's rally was particularly pronounced on Thursday, where it rose as much as 0.8% versus the greenback, despite Japan's economy showing a greater-than-expected contraction in the first quarter. Koji Fukaya, a fellow at Market Risk Advisory in Tokyo, highlighted that the primary driver behind the yen's rebound is the anticipation of a potential Fed rate cut, which has diminished the immediate need for Japanese authorities to intervene in the currency market.

Dollar Weakens, Treasury Yields Tumble

Following the release of the US CPI report for April, which indicated a softening in inflation pressures, the dollar experienced a broad weakening against its peers, with the yen emerging as one of the major beneficiaries. The core measure of inflation rose by just 0.3% from March, signaling potential relief for the Federal Reserve's inflation concerns. This led to a significant drop in US Treasury yields, with 10-year yields hitting a five-week low of around 4.42%. The Bloomberg gauge of the greenback fell, highlighting the impact of the CPI data on the financial markets. The narrowing gap between US and Japanese benchmark bond yields has also played a role in the yen's strength, reminiscent of similar movements in late 2022.

Market Reactions and Central Bank Speculations

The market's response to the US inflation data has been swift, with traders ramping up bets on the Federal Reserve easing monetary policy this year. This speculation is supported by overnight indexed swaps, which, despite a slight decline, still suggest a 63% likelihood of a Bank of Japan (BOJ) benchmark rate hike by July. Japanese Finance Minister Shunichi Suzuki's emphasis on "close policy coordination" between the government and BOJ underscores the delicate balance Japanese policymakers are trying to maintain in managing the yen's value without resorting to direct intervention. Meanwhile, Federal Reserve Chair Jerome Powell's recent comments have further fueled speculation about the central bank's next moves, with traders increasingly betting on rate cuts.

Street Views

  • Koji Fukaya, Market Risk Advisory (Neutral on the yen):

    "The latest yen rebound eases the need for authorities to intervene... the biggest driver of the yen rebound is the US, especially the potential Fed rate cut."

  • Sebastian Boyd, Markets Live Strategist (Neutral on Treasuries and yen):

    "My models still show both Treasuries and the yen as cheap, implying that US yields can fall further while the yen gains. However, the near-term risk is that, after a 27-bp rally month-to-date, two-year yields retrace some of their moves — and that would also cause the yen to also give back some of its recent gains. In the absence of drivers, the default setting for Japanese currency seems to be to weaken."

  • Hirofumi Suzuki, Sumitomo Mitsui Banking Corp (Bullish on Yen):

    "Until recently, dominant trend was for Yen to gradually slide but with weak US indicators and CPI; scenario of a Fed rate cut this year is coming into place... It’s getting easier for Yen to strengthen."