11 Jul 2022

The dollar's continued rise to a 24-year high against the yen and near parity against the euro

The dollar climbed to a 24-year high against the yen on Monday after strong election results from Japan's ruling conservative coalition signaled no change to loose monetary policy and worries about global growth helped the safe-haven U.S. currency more broadly.
The dollar climbed as high as 137.28 yen in morning trading, its strongest since late 1998. It then pared those gains and was last up 0.6 percent at 136.93.

The dollar was also firm against the euro, which fell 0.34 percent to $1.0151 and returned to a 20-year intraday low on Friday, leaving the dollar index up 0.36 percent to 107.3.

"The dollar is strengthening across the board, but the dollar is leading the move," said National Australia Bank currency strategist Rodrigo Catril.

He said investors' shift away from riskier assets supported the dollar overall, while the yen was under particular pressure due to a combination of high U.S. benchmark yields and Sunday's election result suggesting no change to Japan's expansionary economic policy.

The Bank of Japan's policy of keeping Japan's benchmark yields pegged to support the economy has, along with high US interest rates, been a major factor in the yen's recent weakness, and the resulting rise in prices has sparked some consumer anger.

But the coalition led by Prime Minister Fumio Kishida's Liberal Democratic Party (LDP) increased its seats in the upper house in Sunday's election, and Catril said that could partially ease pressure to change course.

The U.S. 10-year yield was last at 3.087 percent, holding on to last week's gains.

Fear of growth

Outside of Japan, worries about the outlook for global growth, particularly as central banks struggle to curb runaway inflation, pushed flows into safe havens.

"The dollar could remain expensive until risks associated with increased global inflation, European energy security and China's growth outlook are resolved," analysts at Barclays said in a note to clients.

"US CPI will be an important piece of the puzzle this week as the Fed decides between 50 and 75 basis points ahead of the July meeting."

US CPI data is due on Wednesday and markets would likely interpret the high readings as a sign that the Federal Reserve will need to raise rates even more aggressively to fight inflation.

With inflation running high across much of the world, rate hikes are also expected this week from the Reserve Bank of New Zealand on Tuesday and the Bank of Canada on Thursday.

Energy concerns meant the euro struggled against more than just the dollar, trading at 0.85 British pence and 139 yen on Monday, just above last Friday's levels, when both currencies hit their lowest since late May.

In the latest concern for the European economy, annual maintenance on the largest single pipeline carrying Russian gas to Germany begins on Monday. Flows are expected to stop for 10 days, but governments, markets and companies fear the shutdown could be extended due to the war in Ukraine.

Another major economic event this week is China's second-quarter GDP data on Friday, as investors watch for signs of how hard the economy has been hit by the COVID-19 lockdown.

Britain will release its second-quarter GDP figures on Wednesday, but the focus is more on the ruling Conservative Party's choice of its next leader and prime minister.

Sterling was down 0.38 percent against a stronger dollar at $1.1986 on Monday morning as last week's volatile time ended not far from where it began, while the risk-friendly Australian dollar fell 0.6 percent to $0.6814.

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