The dollar held gains against its major counterparts on Thursday as markets positioned for central bank decisions in Britain, Europe and Japan.
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The dollar was on track for its biggest weekly gain since mid-June, buoyed by the rise in oil prices, while the yen was poised for its largest weekly percentage decline in more than two months as the currency languishes at 40-year lows despite Japan’s pledges to stabilise the currency.
Verbal efforts to support the yen have seen muted results, with Japan’s Finance Minister Satsuki Katayama once again reiterating on Friday the government’s readiness to take action in the foreign exchange market.
Some analysts see another intervention by Japanese officials as likely to have only a short-term effect, similar to recent interventions in the currency, without coordinated steps such as a more aggressive path of rate hikes by the Bank of Japan (BOJ).
The U.S. Treasury Department on Thursday joined calls for rate hikes by the BOJ, warning that excessive currency volatility was undesirable.
Markets have completely priced out any chance of a rate hike from the BOJ at its policy meeting next week, according to LSEG data.
Limited effect from yen support
“It’s not surprising that dollar-yen has gone up under the conditions that we’re facing. It’s a low-yielding currency facing a terms-of-trade shock with higher oil prices,” said Thierry Wizman, global FX & rates strategist at Macquarie Group in New York.
“So if there’s going to be a currency that the specs are going to go after in those conditions, it’s going to be the yen… And so that girds the whole thesis for why it’s been dollar-yen…doing so well since the war began, since oil prices went up.”
The dollar index, which measures the greenback against a basket of currencies, fell 0.04% to 101.48 but was up 0.7% for the week, on track for its biggest weekly gain in five weeks.
Against the Japanese yen, the dollar weakened 0.01% to 163.84 but was up nearly 0.9% on the week, which would mark its strongest week since May 15. On Thursday, the dollar hit 163.98, its strongest against the yen since November 1986.
Inflation concerns rekindle dollar
The dollar has been rising in recent days as renewed strikes in the U.S.-Iran conflict have caused a reversal in oil prices and again fanned inflation fears, in turn buoying expectations the Federal Reserve may hike interest rates.
The U.S. economy is seen as more insulated from energy price shocks compared with Europe and Japan, which has also supported the dollar.
U.S. crude fell 3.33% to $89.12 a barrel and Brent fell to $96.45 per barrel, down 4.21% on the day, with Brent retreating from the two-month high of $102 hit on Thursday.
Expectations for a rate hike from the Federal Reserve at its meeting next week have increased to 35.8%, up from 12.8% a week ago, as cool U.S. inflation data for June briefly supported hopes the Fed could delay rate hikes, but the escalating Middle East conflict has rekindled concerns about price pressures.
The euro edged down 0.06% to $1.1368, and was down 0.6% on the week, a day after the European Central Bank left interest rates unchanged but kept the possibility of a September hike alive.
Traders are pricing in a 80.1% chance of a rate hike in September, according to CME FedWatch data.
