The US dollar skyrocketed to a new 24-year high against the yen after the BoJ (Bank of Japan) stuck to ultra-easing stimulus on Thursday, just hours after the Fed surprised markets with hawkish interest rate projections. Both the Fed projections and the Russia headlines contributed to the dollar’s strength, which was particularly acute against the euro and other European currencies.
The Fed issued new projections showing rates peaking at 4.6% next year with no cuts until 2024. It raised its target interest rate range by another 75 basis points overnight to 3.00%- 3.25%, as was widely expected.
The yen went for a wild ride in the immediate aftermath of the BOJ’s decision to keep short-term rates negative and continue to pin the 10-year government bond yield near zero, reinforcing market expectations that Japan’s central bank will continue to swim against a global tide of monetary tightening, despite a weaker currency. The market will be nervous, there will be some volatility for a while, but eventually, over the medium term, the weak yen trend will continue.
The 1998 peak was at 147.60, so the market will be looking at that level. Japan’s top currency diplomat said later that officials had not intervened in the market.
The dollar index, which measures the greenback against a basket of six counterparts including the yen, euro and sterling, had earlier risen as high as 111.79 for the first time since mid-2002.
The dollar was already supported by demand for safe-haven assets after Putin announced he would call up reservists to fight in Ukraine and said Moscow would respond with the might of all its vast arsenal if the West pursued what he called its “nuclear blackmail” over the conflict there.
The market currently sees 80% odds for a 75 bps rate hike by the BOE, and 20% probably of a half point increase.
Going ahead, the dollar index on the charts has formed a strong base near 110 and if this level is sustained with the support of a volume, there could be another leg of a rally to 113 levels. In that scenario, the USDINR pair has all the potential to go above 81, amid escalation of a geopolitical risk between Russia and Ukraine. To add to the pain, in case the energy cost goes higher, the rupee may continue to slide.
(The author is
Senior Research Analyst of Commodities & Currencies, Securities)