Asian currencies weaken as dollar rises, yen holds near seven-month high
Asian currencies weakened against the U.S. dollar on Monday as traders increased bets on a Federal Reserve rate hike this week, while the Japanese yen remained near a seven-month high as markets also positioned for tighter Bank of Japan policy.
The U.S. dollar index was around 99.35, up 0.2%, after rising 0.12% on Friday and ending two weeks of modest declines. The EUR/USD pair fell 0.3% to 1.1564, while the GBP/USD pair slipped 0.2% to 1.3501.
The USD/JPY pair rose 0.3% to 154.03, leaving the yen near the 152.89 level reached last week, its strongest since February. The yen is up about 4% this month as investors price a faster BOJ tightening cycle and the possibility that Japanese investors repatriate overseas assets.
Dollar gains as Fed hike bets surge
Markets now see an 86% probability of a Federal Reserve rate hike at its September 16 meeting, according to CME FedWatch, after U.S. consumer prices accelerated in August.
The jump in expectations has supported the dollar and pushed Treasury yields higher. The 10-year yield was around 4.97%, while the two-year yield, which is particularly sensitive to Fed expectations, remained above 4.6%.
Three major central-bank decisions are due this week. The Fed meets Wednesday, the Bank of England on Thursday and the BOJ on Friday. The sequence could reshape expectations for global monetary policy into the final months of the year.
The dollar’s gains have nevertheless been relatively contained. Other major central banks are also expected to tighten policy, while concerns around the Fed’s policy credibility have limited the currency’s upside.
Brent crude rose nearly 3% to $107.60 a barrel after fresh attacks in the Middle East added to supply concerns. Oil has remained firmly above $100, complicating the outlook for central banks as higher energy costs threaten to keep inflation elevated.
Yen rally faces a test from BOJ guidance
The yen has remained supported by expectations that the BOJ will deliver another 25-basis-point hike on Friday. Markets have almost fully priced that move, leaving guidance on the pace of subsequent tightening as the key question for the currency.
That leaves the BOJ’s communication as important as the hike itself. The yen’s 4% gain this month has also started to change market positioning, with speculators turning net long for the first time since February.
Elsewhere, the Australian dollar weakened, with the USD/AUD pair up 0.4% at 1.3991. The NZD/USD pair fell 0.5% to $0.5782.
The Chinese yuan was largely steady. The USD/CNH pair rose 0.01% to 6.7080, while the USD/CNY pair eased 0.01% to 6.7073.
The USD/KRW pair rose 0.25% to 1,344.86, while the USD/SGD pair gained 0.16% to 1.2691. Indian markets were closed for a public holiday.
With the Fed, BOE and BOJ all due to set policy this week, currency markets are likely to remain focused on the pace of rate adjustments and whether renewed energy inflation forces central banks to keep policy tighter for longer.
