FOREX-Dollar ascendant as Fed cut bets pared, jawboning props up yen

The Japanese yen firmed slightly on Tuesday to 151.75 per dollar, after earlier dipping to 151.79. That was the weakest level since it reached a 34-year trough of 151.975 on Wednesday, spurring Japan to step up warnings of intervention.

The U.S. dollar hovered near a 4-1/2-month peak against major peers on Tuesday as traders rushed to push back bets for the Federal Reserve's first interest rate cut this year. The dollar renewed a six-week high versus the euro and was on the cusp of doing the same against the sterling, after U.S. data from Monday unexpectedly showed the first expansion in manufacturing since September 2022.

Fears of intervention by Japanese officials slowed the dollar's gains against the yen, however, even as long-term U.S. Treasury yields - which the currency pair tends to track - jumped to a two-week top overnight. Gold, which performs best when yields are falling, found its feet after getting knocked back from a record peak on Monday.

The U.S. rate futures market now factors in 61.3% odds of a Fed rate cut in June, down from about 70.1% probability a week ago, according to the CME's FedWatch tool. "The divergence of solid growth dynamics for the U.S. and waning Fed rate cut risk against sluggish growth for other FX majors suggests that any DXY dips should be seen as buying opportunities," said Westpac's head of currency strategy, Richard Franulovich, referring to the dollar index.

"Targets in the 106 region look feasible from here," for the dollar index, with 104.50 acting as support, he said. The dollar index, which measures the currency against the yen, euro, sterling and three other peers, edged 0.05% higher to 105.05, after earlier reaching 105.07, matching the high from Monday.

The euro slipped 0.08% to $1.07335, after dipping as low as $1.07295. Sterling was 0.04% lower at $1.25455 after sliding to $1.2541, just above the low of $1.2540 from the prior session. The Japanese yen firmed slightly on Tuesday to 151.75 per dollar, after earlier dipping to 151.79.

That was the weakest level since it reached a 34-year trough of 151.975 on Wednesday, spurring Japan to step up warnings of intervention. On Tuesday, Finance Minister Shunichi Suzuki reiterated that he wouldn't rule out any options to respond to disorderly currency moves. Japanese authorities intervened in 2022 when the yen slid toward a 32-year low of 152 to the dollar.

The yen's decline has come despite the Bank of Japan's first interest rate hike since 2007 last month, with officials cautious about further tightening amid a fragile exit from decades of deflation. "This is a tricky one" for Japanese officials, who are "wary of backing themselves into a corner by drawing a line in the sand at 152," said Nicholas Chia, Asia macro strategist at Standard Chartered.

"The rationale of jawboning and intervening in FX markets is mainly to buy time for the JPY in the hopes that USD strength wanes and recedes." Elsewhere, China's yuan fell to a 4-1/2-month low as a strong dollar offset selling of the U.S. currency by state-owned banks. The yuan fell to a low of 7.2349 per dollar on the day, its weakest level since November 2023.

The Australian dollar was flat at $0.6490, after skidding to a nearly one-month low of $0.64815 on Monday. New Zealand's kiwi dollar eased 0.1% to $0.5947, edging back towards the 4-1/2-month trough at $0.59395 from overnight.

Spot gold edged up 0.22% to $2,255.27, after dropping back from a record high at $2,265.49 in the previous session. Leading cryptocurrency bitcoin declined 4.4% to $69,707 following a sudden drop of more than $3,000 in the space of about 15 minutes.

"There was a weird little air pocket (that) coincided with the start of trade in China," with mainland blue chips starting the day weaker, said Kyle Rodda, senior markets analyst at Capital.com. "We've seen China's open as an intraday direction driver recently."

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)