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Currencies: Dollar domination continues, as yen slumps to two-decade low

The dollar roared higher across major rivals on Thursday, notably against the yen, which slumped to a level not seen in two decades as the Bank of Japan vowed to continue a dovish stance and pledged unlimited bond buying.

The yen

slid 1.3% to ¥130.20 against the dollar, a level not seen in more than two decades.

The ICE Dollar Index
which measures the U.S. dollar against major rivals, climbed 0.4% to 103.39, the highest since January 2017, according to FactSet.

At its policy meeting, the Bank of Japan pledged to buy unlimited 10-year fixed-rate Japanese Government Bonds

to defend a 0.25% yield level.

“They also raised their inflation forecasts, now projecting core CPI to to reach +1.9% in the current fiscal year ending in March 2023, before moderating to +1.1% in the following two fiscal years,” noted a team of Deutsche Bank strategists led by Jim Reid.

“So a big difference in stance to the other major central banks like the Fed and the ECB which have been progressively moving in a hawkish direction over recent months, and this saw the Japanese yen weaken further…” Reid said.

Ongoing lockdowns in China, Russia’s war in Ukraine, and likelihood of aggressive central bank hikes, notably in the U.S., have been weighing on investor’s minds and driving them out of perceived riskier assets, noted Matthew Ryan, senior market analyst at Ebury.

“These risks to growth, combined with the sharp move higher in inflation globally, has triggered one of the most violent selloffs in risk that we’ve seen in some time, certainly since the start of the COVID-19 pandemic in March 2020,” he said, in a note.

The dollar could cool later, though, with the release of U.S. growth data, due ahead of the market open. Economists polled by Dow Jones Newswires and The Wall Street Journal are expecting growth to slow markedly, from 6.9% in the fourth quarter, to 1% in the first quarter.

“We expect the market today to focus on the release of the US GDP advance rate for Q1 and should the rate slowdown substantially as expected, we may see the USD weakening as it would imply a slowing down of the growth rate for the U.S. economy, while the release may have ripple effects in the U.S. stockmarkets as well,” said Peter Iosif, senior research analyst at Noteris, in a note to clients.

Weakness also continued for the euro
down 0.3% against the dollar at $1.0524, and down 2.7% so far this week.

The common currency has come under fresh pressure from news Russia cut gas supplies to Poland and Bulgaria. While the Federal Reserve is widely expected to raise interest rates at its early May meeting, and keep hiking, many see the European Central Bank unable to do the same. Economists expect fallout from Russia’s war in Ukraine to prove a harder hit on Europe’s economy, which is struggling to break its reliance on Russian energy supplies, than that of the U.S.

“Germany’s economy ministry said on Wednesday that it was revising lower its 2022 growth forecast to 2.2% from 3.6%, which heaped further downward pressure on the euro,” said Ryan.

“Comments from ECB member [Martins] Kazaks that the bank could raise rates three times this year, including at the July meeting, helped put a bit of a temporary floor under the euro, although further downside is likely so long as market sentiment remains fragile,” he said, in a note.

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