The dollar index reached 101 points on Tuesday for the first time since March 2020, which may be influenced by rising US government bond yields. Investors appear to be expecting a series of half a percentage point interest rate hikes from the Federal Reserve, which is trying to contain rising inflation. In the article you will learn, among other things:
The yen lost over 5% to the dollar in April
James Bullard, Fed chairman of St. Louis, known for his hawkish views, said on Monday that US inflation was far too high, reiterating his arguments in favor of raising interest rates to 3.5%. by the end of the year.
Will the Fed accelerate interest rate hikes?
Last month, the Fed raised its target rate by 25 basis points, and the forecasts released at the time indicated that interest rates could rise to 1.9% by the end of the year. Bullard’s preferred path would require a rate hike of half a percentage point at all six other Fed meetings this year. There was also a statement in James Bullard’s comments that interest rates may rise by 75 basis points to accelerate the entire monetary tightening cycle. From a monetary policy perspective, there may be a strong divergence between the Fed’s actions and the rest of the central banks, including the Bank of Japan. This, in turn, could translate into currency rates, including the USD / JPY pair, which hit 128 yen per dollar.
Yen weakness benefits exporters
From the beginning of the year, the yen may have lost 10 percent to the USD, and in April alone, more than 5 percent. In this situation, according to Bloomberg, the yen seems to have lost the most against the dollar since 1971. Although the Japanese finance minister tried to intervene verbally in the currency market, it may not have brought much comfort to the USD / JPY rate. The weak yen could theoretically help the Japanese economy raise the inflation rate due to more expensive imports of products from abroad. It can support Japanese producers who export their goods, potentially increasing their competitiveness. For Japan, the current situation can therefore be quite comfortable. Only when inflation got out of control would be an undesirable phenomenon.
SNB limits the appreciation of the franc
The USD / CHF exchange rate recorded a 12-month high as the pair may be under pressure from the strong dollar despite potential interventions by the Swiss Bank. Overnight deposits with the SNB increased by CHF 2.2bn in the week ended April 8 compared to the previous week, after an increase of CHF 5.7bn in the previous week. The increase in deposits is commonly viewed as an indicator of central bank foreign exchange interventions to dictate the amount of credit added to the accounts of commercial banks that hold newly formed francs in exchange for foreign currency. At the last meeting, the SNB emphasized that it would limit the appreciation of the franc, which is close to the 7-year high against the euro. This level was achieved after Russia’s invasion of Ukraine.
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