On Monday, the dollar surged to its highest level against the Japanese yen in over a year, benefiting from reduced expectations for U.S. Federal Reserve (Fed) interest rate cuts in 2024, before falling sharply following high volumes of options trades.
At the beginning of the session, the dollar rallied to 151.92 yen, reaching its highest point since October 2022, approximately 20 minutes before the expiry of some $1.25 billion in options contracts with a 152 strike price, as per analysts' observations.
The dollar saw a drop to 151.20 just minutes after the 10 a.m. ET (1500 GMT) strike price deadline. Analysts surveyed by Reuters noted that an additional $2.2 billion in options contracts is scheduled to expire on Wednesday. The price drop was not the result of Bank of Japan intervention, the analysts said.
Japanese Finance Minister Shunichi Suzuki recently said that the government would closely monitor the currency market and respond appropriately. Despite these comments, the Japanese yen, which has depreciated nearly 14% against the dollar this year, showed little immediate reaction.
The overall sentiment in global currency markets was subdued, with traders awaiting the latest U.S. inflation figures on Tuesday to gauge the likelihood of interest rate cuts next year.
In a comment to the Reuters news agency, Societe Generale analyst Kit Juckes said:
"We're in this pause where the dollar has peaked and the U.S. economy is slowing but people are going to wait for confirmation. Given the move in U.S. Treasuries of course the yen is not rallying yet.
The USD to JPY exchange rate hit 151.88 yen on Monday, marking the pair’s highest level since October 2022. The dollar to yen rate saw a 0.15% increase on the day, building on last week's rally of around 1.4% — the largest weekly gain against the Japanese yen in three months.
Last week, Federal Reserve policymakers, including Fed Chair Jerome Powell, indicated that the fight against inflation might not be over, leading to a reduction in market expectations for rate cuts. This, in turn, elevated short-dated Treasury yields and bolstered the greenback.
The DXY dollar index, which measures USD strength against several major currencies, held steady at around 150.80, retaining most of last week's gains.
Late on Friday, the market showed little response to rating agency Moody's downgrading the outlook for U.S. credit from stable to negative.
Data released from Japan on Monday revealed that wholesale inflation had slowed to below 1% for the first time in over 2.5 years, suggesting diminishing cost pressures that had been driving up prices and giving minimal support to the yen.
Despite the news, market participants remained vigilant for potential intervention from Tokyo to strengthen the struggling yen.
Talking about Japanese currency intervention risks, BNY Mellon senior macro strategist Geoff Yu told Reuters:
"At this point it's still about the pace of moves so if we move at the current pace it is manageable for Japan. Overall, the dollar environment is driving things.”
In a note on Monday, economists at Societe Generale issued a bearish yen forecast, saying the USD to JPY pair could trade towards 152.80 and 153.60 in the coming days:
“USD/JPY successfully defended the support of 148.80 representing late October low in recent pullback. This test has resulted in a bounce. The pair is now challenging the peak of 2022 near 152. If this hurdle is overcome, the phase of uptrend is likely to extend towards next projections at 152.80 and 153.60.
Only if the pair breaks recent pivot low near 148.80 would there be risk of a larger down move.”
At the time of writing on Monday, the USD to JPY exchange rate traded at 151.68, with the greenback having risen by close to 0.15% against the Japanese yen on the day, as per MarketWatch data.
The DXY dollar index was largely stable around the 105.90 area.
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