As news that Japanese Prime Minister Shinzo Abe would resign pushed the yen higher on Friday, the US dollar fell heavily against most major currencies — weighed down by the prospect of long-term lower US interest rates.
Japanese stocks fell and the safe-haven yen erased some recent losses overnight when it was reported that Abe, the nation’s longest serving prime minister, would step down due to worsening health.
The yen, which had fallen to a two-week low of ￥106.945 per US dollar, rose on the news to as much as ￥106.025. By 07:35am GMT it had eased slightly to ￥106.06, up 0.5 percent since New York’s close.
ING strategists wrote in a note to clients that “Abenomics” was one of the key factors in the yen’s weakness in previous years.
However, what matters most for the yen is the Bank of Japan’s stance and it is too early to say whether Abe’s resignation would materially impact the central bank, they said.
“Nonetheless, concerns about the post-Abe shift in the policy stance add to our bearish USD/JPY outlook (we target USD/JPY 102 by year-end), though we continue to see USD weakness as the main driver of the cross,” ING wrote.
At the hotly anticipated virtual Jackson Hole conference on Thursday, US Federal Reserve chairman Jerome Powell said that the US central bank would seek to keep inflation at 2 percent, on average, so that periods of too-low inflation would likely be followed by an effort to lift inflation above 2 percent for some time.
In practice, market participants expect that this means the current ultra-low rates will stay lower for longer.
The US dollar fell to as low as 92.418 versus a basket of currencies, while Powell was speaking, then quickly recovered.
However, it started to slide again overnight, extending losses in early London trading.
By the end of Friday, the US dollar index was at 92.30, down 0.75 percent on the day.
However, the New Taiwan dollar dropped against the US dollar on Friday, losing NT$0.011 to close at NT$29.521, down 0.03 percent from a week earlier.
Commerzbank FX analyst Thu Lan Nguyen wrote to clients that this new strategy turned US monetary policy into a black box — a system whose workings cannot be understood from the outside — as it suggested the Fed was not following any specific formula to determine when to hike rates and could choose the time period over which to measure average inflation.
“It seems to me that the market has not totally grasped the implications of yesterday’s monetary policy change for the US currency,” she wrote. “Of course, the dollar had to take a pummeling already over the past weeks, but I do see further depreciation potential.”
Currency markets were broadly pro-risk. The New Zealand dollar rose to new two-week highs versus the US dollar, while the Australian dollar rose to its highest since December 2018 at 0.73135.
As the US dollar weakened, the euro rose to as high as US$1.18975. The single currency seemed little affected by weakening consumer morale in Germany casting doubt on household spending in Europe’s largest economy.
Additional reporting by staff writer, with CNA
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