The US Dollar Extended Its Gains Against the Yen as a Major Fed Hike Bets Ramp-Up

On the 8^th of August, the US dollar extended its best rally against the yen after mid-June, uplifted by higher Treasury yields. This occurs after jobs data in the US boosted expectations for aggressive tightening in the Federal Reserve policy.

Recently, the dollar value increased by 0.31% to 135.42 yen, and previously it rose to 135.585 yen, which marked the highest since July 28. It reached its highest level after increasing by 1.57% in the earlier trading session, which resulted in its biggest gain in a single day since June 17.

The dollar index that determines the currency’s value against its other six counterparts remained at 106.77, from a peak of 106.93 on Friday, which was also recorded as the strongest since July 28.

According to traders, presently, there is a 73.5% chance that the Fed will likely continue the speed of increases in its interest rates by 75-basis-points for its upcoming policy decision on the 21^st of September. On the other hand, 41% before surprisingly strong payroll data released on Friday increased concerns that wage growth would contribute to inflationary pressures.

This week, the primary focus will be on the US consumer price index, which dues on Wednesday, and if it can fix the likelihood of a significant increase in rates. Analysts are expecting to ease the annual inflation to 8.7% in the month of July from the previous estimation of 9.1%.

Chris Weston, the head of research at Pepperstone, wrote in a note that to get the probability of a 50-basis-point hike in September as the default setting, it is anticipated to decline to a number below 8.4%, which ultimately seems unlikely. If the CPI print ended up being more than 9%, then no one would expect the dollar to decline.

On Monday, in Tokyo trading, the two-year Treasury yield stayed at an increasing level of 3.2628%, after going up to 3.3310% at the end of the previous week, marking a level that has not been seen since mid-June.

The 10-year yield remained at 2.8470%, which sticks close to the high of 2.8690% in two weeks.

The two- and 10-year yields had a negative spread of 42-basis-points among them, which reached up to 45-basis-points on Friday, resulting in the most significant hit since August 2000. An inverted yield curve is widely believed as an indication of a recession.

Except for this, the sterling declined by 0.19% to US$1.2050, while the euro dropped by 0.35% to US$1.01595. On Friday, the British Pound declined by an all-time low of US$1.2004. This occurred a day after the Bank of England increased its interest rates by half a point, which was expected to happen simultaneously as signs of an economic downturn.

Jane Foley, a senior FX strategist at Rabobank, wrote in a note that the Bank of England’s estimation of a potential recession resulted in supporting the vulnerability of the pound in the future. She predicted sterling could be inclined towards US$1.14 within 3 months.

Meanwhile, the New Zealand dollar declined by 0.19% to US$0.62315, and the Australian dollar plunged by 0.06% to US$0.6907.