Dollar Lower, Yen Gains; Central Bank Actions in Focus

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Dollar Lower, Yen Gains; Central Bank Actions in Focus

The U.S. dollar edged lower Friday, with the much-battered Japanese yen seeing some respite, at the end of a week which has seen rising expectations o

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The U.S. dollar edged lower Friday, with the much-battered Japanese yen seeing some respite, at the end of a week which has seen rising expectations of a faster Federal Reserve tightening cycle.

At 4:15 AM ET (0815 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% lower at 98.655.

The dollar has seen buying this week as a number of Federal Reserve policymakers have lined up to signal that the central bank is prepared to take strong action to combat inflation at 40-year highs.

The Fed raised the benchmark lending rate by a quarter point at their meeting last week, the first increase since December 2018, and expectations are rising that the U.S. central bank will hike by a more aggressive 50 basis points when it next meets.

We think the market “is inching closer to pricing in 100bp of rate hikes by the Federal Reserve at the next two meetings,” said analysts at ING, in a note.

U.S. benchmark 10-year yields were last seen trading at 2.36%, not far removed from the highest level since 2019, providing support for the dollar.

Goldman Sachs raised its forecasts on U.S. Treasury yields for this year, given this hawkish pivot by the Federal Reserve. The influential investment bank now expects benchmark 10-year yields to rise to 2.7% by year-end, up from its previous forecast of 2.25%.

USD/JPY fell 0.6% to 121.65, falling back from a six-year high, following the lack of intervention from the Bank of Japan when selling pushed its 10-year government bond yields close to its 0.25% target, climbing 3 basis points to a six-year high of 0.24%.

While this lack of intervention hinted at policy flexibility, the yield differential still suggests the USD/JPY has further to climb.

Elsewhere, EUR/USD rose 0.1% to 1.1012, helped by falling European natural gas prices with a deal between President Joe Biden and the European Union paved the way for more imports from the U.S. to reduce the bloc’s reliance on Russian energy expected to be announced on Friday.

“The underlying tone has firmed somewhat and EUR could edge higher today,” said foreign exchange strategists at UOB Group, “However, any advance is expected to face solid resistance at 1.1045. Support is at 1.0985 followed by 1.0965.”

GBP/USD fell 0.1% 1.3175 after British retail sales unexpectedly falling 0.3% in February from January, compared with the expected 0.6% monthly rise.

British inflation rose to a new 30-year high of 6.2% last month, at the very top end of expectations, and this drop in retail sales is unlikely to cause the Bank of England to stop its rate-hiking cycle.

AUD/USD dropped 0.1% to 0.7507, NZD/USD fell 0.1% to 0.6958, both handing back a small portion of their recent gains, while USD/CNY edged lower to 6.3656.

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