The US Dollar Strength Builds On Hawkish Fed Bets, Pressuring Yen Near 40 Year Low

The US dollar strengthened on expectations of a Hawkish Federal Reserve, while the yen remained near its weakest level in about 40 years.

The US dollar strength steadied on Tuesday as traders braced for a more Hawkish Federal Reserve, oil prices bounced back after steep losses and the yen flirted with a four-decade low.

The US treasury yields stayed high after a jump on Monday, with those on interest-rate sensitive 2-year notes near a 16-month high as traders braced for a possibility of rate hikes later this year.

Fed funds futures are pricing in a three-quarters chance of a hike by September. BofA Global Research and Deutsche Bank have abandoned previous expectations of no policy change and now see the Fed raising rates within the year, citing the resilience of the economy.

“The dollar is holding firm on rising yields and hawkish Fed bets.” - Sim Moh Siong, FX strategist at OCBC.

The dollar index, which evaluates the US dollar against a basket of currencies that includes the yen and the euro, was marginally higher at 101.01 than it was late last week at its one-year high of 101.13.

In addition to supporting the US dollar, oil prices rose on Tuesday as investors awaited more conclusive signs of the resumption of petroleum supplies through the Strait of Hormuz after a sharp drop the day before due to advances in US-Iran security peace talks. 

The Yen is at a 40-year Low

After momentarily declining to a two-year low of 161.93 late on Monday, the Japanese yen last traded at 161.59 as the US dollar continued its wide gains. The yen would hit its lowest point since 1986 if it broke above 161.96.

The lack of unambiguous signals from Japanese financial authorities suggested a change in communication strategies, leaving markets speculating about potential currency intervention.

CIO Bulletin is of the view that the markets anticipate that the Fed will maintain higher interest rates for a longer period of time, dollar assets are becoming more appealing, which is why the US currency is gaining. Because of Japan's extremely low interest rates and sluggish policy tightening, the yen is still weak, close to multi-decade lows.