FOREX-Dollar rally pauses as yen finds support on G7 assurance

The yen, meanwhile, briefly strengthened as Japan's top currency diplomat Masato Kanda said finance leaders of the G7 reaffirmed their stance that excessive currency volatility was undesirable. The greenback has been rising in recent weeks as strong U.S. economic data and persistent inflation dashed expectation of near-term rate cuts.

The dollar softened on Thursday as traders assessed the U.S. interest rates outlook in the wake of comments from Federal Reserve officials that cemented expectation of monetary settings remaining restrictive for a while longer. The yen, meanwhile, briefly strengthened as Japan's top currency diplomat Masato Kanda said finance leaders of the G7 reaffirmed their stance that excessive currency volatility was undesirable.

The greenback has been rising in recent weeks as strong U.S. economic data and persistent inflation dashed expectation of near-term rate cuts. Tensions in the Middle East have also added to the dollar's safe-asset appeal. Dollar strength has cast a shadow across currency markets, keeping the yen rooted near 34-year lows and leading to several warnings from Japanese authorities as traders fret about possible intervention. Emerging-market currencies have also been under pressure. The U.S., Japan and South Korea agreed to "consult closely" on foreign exchange markets in their first trilateral finance dialogue on Wednesday, in a nod to concerns from Tokyo and Seoul over their currencies' recent sharp declines.

"The statement is likely intended to rein in markets and raises the possibility of a joint market intervention if JPY and KRW are to weaken further against the USD," said Wei Liang Chang, a currency and credit strategist at DBS. The Japanese currency strengthened to 153.96 on Thursday, after Kanda told reporters of the G7 finance leaders' agreement to reaffirm their commitment on currency moves.

It last stood at 154.345, not far from the 34-year low of 154.79 touched on Tuesday. Market participants have raised the bar on possible intervention by Japanese authorities to prop up the yen, now pinpointing the 155 level from 152 previously, even if they believed Japan could step in at any time.

Still, given the dollar's broad strength, DBS's Chang said their models suggest the risk of intervention may have shifted even higher to the 156 range, as Japanese authorities weigh the yen's level against a handful of other currencies that have depreciated. Japan last intervened in the currency market in 2022, spending an estimated $60 billion to defend the yen.

The euro was largely unchanged at $1.0676, after notching a 0.5% gain on Wednesday and lifting away from a five-month low touched on Tuesday. Sterling was last $1.2465, up 0.15% on the day. The dollar index, which measures the U.S. currency against six peers, was last down 0.08% at 105.87, inching away from the five-and-a-half-month high of 106.51 hit on Tuesday as traders consolidated positions. The index is up 4.5% this year.

Markets are pricing in 44 basis points of cuts from the Fed this year, drastically lower than the 160 bps expected at the start of the year, with September becoming the latest starting point of the easing cycle, showed the CME FedWatch Tool. Traders had earlier expected the Fed to start cutting rates in June but a string of data including the consumer price index (CPI) and push-back from central bankers have altered that expectation.

U.S. economic activity expanded slightly from late February through early April and firms signalled they expect inflation pressure to hold steady, a Federal Reserve survey showed on Wednesday. Fed Governor Michelle Bowman on Wednesday said progress on slowing U.S. inflation may have stalled, and it remains an open question whether rates are high enough to ensure inflation returns to the Fed's 2% target.

"In our view it will take a run of lower CPI readings for the FOMC to cut interest rates in September," said Kristina Clifton, senior economist at Commonwealth Bank of Australia. Elsewhere, the Australian dollar was up 0.12% versus the greenback at $0.6442, while the New Zealand dollar eased a bit to $0.5917 after spiking 0.6% on Wednesday.

 

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