SINGAPORE–The dollar was broadly steady on Wednesday, keeping the yen rooted near 34-year lows after comments from Federal Reserve officials, including Chair Jerome Powell, suggested U.S. interest rates are likely to stay higher for longer.
Top U.S. central bank officials including Powell backed away on Tuesday from providing any guidance on when interest rates may be cut, saying instead that monetary policy needs to be restrictive for longer, dashing investor hopes for significant easing this year.
The comments follow a slew of data in recent weeks that have underscored the strength of the U.S. economy along with persistent inflation.
“Right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us,” Powell said at a forum in Washington.
The dollar was broadly steady, with the euro at $1.0621 on Wednesday, not far from the five-and-half-month low of $1.06013 it touched on Tuesday.
Against a basket of currencies, the dollar was last at 106.32, just shy of the five-month peak of 106.51 touched on Tuesday. The index is up 5% for the year.
Powell’s comments further squashed any lingering expectations of the Fed cutting rates in the near term, with markets pricing in September as the new starting point of the easing cycle, pushing back from June.
Traders now anticipate 40 basis points of cuts in 2024, drastically lower than the 160 bps of easing they priced for at the start of the year.
“Powell and other Fed officials are sticking to the view that rate cuts have been delayed rather than abandoned, which continues to give investors comfort,” said Ben Bennett, APAC investment strategist at Legal And General Investment Management.
“If they start suggesting more hikes are needed, then we could see a repeat of last October’s wobble. I’m watching dollar strength and U.S. real yields very closely.”
YEN WORRIES
The revival of the higher-for-longer narrative for U.S. rates has helped push yields higher, with the benchmark 10-year Treasury yields climbing to a five-month high of 4.696% on Tuesday. They were last at 4.661% on Wednesday.
The yen, which is extremely sensitive to U.S. yields, has been stuck at levels last seen in 1990, with the currency inching closer to the 155 per dollar level that traders worry might result in intervention by Japanese authorities.
On Wednesday, the yen was last at 154.63 per dollar, having touched the 34-year low of 154.79 in the previous session. The Japanese currency is down about 9% against the dollar this year.
“I think dollar/yen will look above the 155 level fairly soon,” said Kieran Williams, head of Asia FX at InTouch Capital Markets.
“While the chorus of Japanese officials verbally intervening in JPY has increased with dollar/yen marching higher since U.S. CPI last week, rhetoric from officials has been more focused on speed of a move rather than levels themselves.”
Japan last intervened in the currency market in 2022, spending an estimated $60 billion to defend the yen.
InTouch Capital’s Williams said it would likely take significantly more than that under current conditions to have a lasting effect with U.S. two-year yields up around 36 bps since the start of April.
The dollar’s strength has cast a shadow across the currency market, with emerging markets in Asia scrambling to stem the decline in their currencies, with the prospect of rate cuts this year in the region swiftly evaporating.
Bank of Korea Governor Rhee Chang-yong said the central bank was ready to deploy measures to calm the market, while Indonesia’s central bank is continuing to intervene in the foreign exchange market ahead of its policy meeting next week.
In other major currencies, sterling was last at $1.2425, but remained close to the five-month low of $1.24055 it touched on Tuesday.
The Australian dollar rose 0.16% to $0.6410 on the day, while the New Zealand dollar rose 0.37% to $0.5902, both pulling away from five-month lows touched on Tuesday.
Data showed New Zealand’s consumer prices rose in line with forecasts in the first quarter but domestically driven inflation remained surprisingly strong, prompting markets to push back the expected start of interest rate cuts.
