December 10, 2023

After substantial losses against the yen, the Australian and New Zealand dollar were highly unstable

After gaining over 4% the day before, the yen dropped somewhat on Wednesday. Because the Bank of Japan (BOJ) altered a crucial policy in an unanticipated manner, rates on government bonds were freed up to fluctuate.

The Bank of Japan (BOJ) decided on Tuesday to alter its “yield curve control” strategy, although it maintained its other policies unchanged. As a result, it now allows 10-year rates to fluctuate within a wider range (50 basis points vs. 25 basis points) around its 0% objective.

The Japanese currency depreciated by 0.13 percent against the dollar on Wednesday, trading at 131.88 US cents. This was close to the yen’s four-month high of 130.58 per dollar, which was hit on Tuesday after the yen surged 3.8% in its greatest one-day rise since 1998.

According to Derek Halpenny, the head of research at the Japanese bank MUFG, the increase indicates that traders anticipate the BOJ will tighten monetary policy even further at its next meeting.

He explained that foreign exchange (FX) was used instead of interest rates because it was “the easiest way to communicate that this was the first step in a process of normalisation.”

The value of one euro was $1.061, down 0.16 percent from the previous day.

The value of the pound dropped 0.68 percent to $1.211. Some people started to get anxious when they saw the government’s borrowing levels.

This action marked a modest departure from the BOJ’s previous ultra-loose monetary policy.

For a long time, Japan’s leaders have been concerned with preventing deflation by increasing prices. Aside from the norm, this year has been exceptional. As other central banks have dramatically raised interest rates to combat inflation and fortify their currencies against the robust U.S. dollar, it has maintained its own rates low.

Market participants, according to Carol Kong, a currency analyst at the Commonwealth Bank of Australia, interpreted the decision as a move away from the present ultra-dovish monetary policy.

She stated that market participants are still trying to piece together what transpired and that the yen’s upward trend could continue in the near future.

New Zealand dollars dropped 0.8% to $0.63, while Australian dollars rose 0.07% to $0.669.

Australia’s and New Zealand’s currencies were volatile after suffering heavy losses versus the yen. The reason for this was the possibility of a halt in “carry trade” flows to Australia and New Zealand brought about by rising Japanese bond yields.

Not much happened in the foreign exchange market on Wednesday, the penultimate business day before the holidays.

The U.S. Federal Reserve swiftly increased interest rates in 2022, which attracted investors back to the country’s fixed-income assets and drove up the value of the dollar.

However, the dollar index is down around 9% from its 20-year peak in September. People in the United States are hopeful that the Federal Reserve will cease raising interest rates because inflation has dropped dramatically.

On Wednesday, the index showing the performance of the dollar relative to a basket of international currencies rose 0.22%, closing at 104.22. Over the course of the whole year, it remained around 8% higher.

As inflation slows and the Fed stops hiking interest rates, many economists predict that the dollar will become considerably lower in the coming year.

After falling to $1.02 in the first three months of the year, Goldman Sachs expects the euro to rise to $1.10 by the end of the year.

 

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