The US dollar yesterday hit a two-month peak against a basket of currencies and a one-month high against the yen, after US Federal Reserve Chair Janet Yellen fanned expectations for US rate hikes in the near term.
Political developments in Tokyo were also supporting the US dollar against the yen.
Japanese Prime Minister Shinzo Abe said he would delay a sales tax hike scheduled for April next year by two-and-a-half years, a senior ruling party official said yesterday.
Japan is also seen compiling a supplementary budget to boost the sputtering economy, a move which is widely expected to be followed by further monetary easing by the Bank of Japan, all of which was keeping the yen on the back foot amid lower volumes in Europe.
London markets were shut for a public holiday, while the US’ were closed for Memorial Day yesterday.
The US dollar rose above ¥111 for the first time since late April, reaching ¥111.39 in early European trading, up nearly 1 percent on the day. For the month, the US dollar is on track for its best show since late 2014 against the yen.
Against a basket of currencies, the greenback was up 0.35 percent at 95.879, while the euro struggled near two-and-a-half-month lows of US$1.1097 hit in the Asian session.
Yellen on Friday said a rate increase in the coming months “would be appropriate,” if the US economy and labor market continued to improve
“Yellen’s comments have raised the chances for a June or July rate hike, supporting the [US] dollar,” said Niels Christensen, FX strategist at Nordea, a large Nordic bank. “A lot though will depend on the data that comes out this week. A good set of numbers will no doubt add to dollar strength.”
This week US non-farm payrolls and the Institute for Supply Management are due and a solid employment report for this month, due out on Friday, could heighten expectations for a move next month.
As recently as early this month, a Fed rate hike next month was completely off the agenda. However, after a string of good data and the Fed officials’ comments, the likelihood of a hike based on CME’s Fedwatch has reached 28 percent.
Meanwhile, prospects for a delay of Japan’s sales tax hike boosted Japanese stocks and dimmed the allure of the safe haven yen, traders said.
“Fiscal policy is positive for the yen, but if the stimulus is accompanied further monetary easing, then it is a yen-weakening factor as brings the concept of ‘helicopter money’ to mind,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.
While a delay in the sales tax hike could shield the floundering economy, it means less income for the cash-strapped government, possibly prompting credit rating agencies to downgrade Japan’s sovereign rating.
“A potential credit downgrade will also hurt the yen,” Yamamoto added.
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