London: The dollar posted its biggest three-week gain versus the yen since 1995 as traders view a US interest-rate increase next month as a certainty.
The greenback has surged about 10 per cent since November 4 to an eight-month high against the Japanese currency. Expectations that President-elect Donald Trump will implement policies to spur inflation and growth drove US Treasury yields to their highest in a year, underpinning demand for the dollar and strengthening the case for the Federal Reserve to raise interest rates. Minutes of the central bank’s November meeting last week showed officials said the labour market has tightened, with some indicating a rate hike should happen in December.
“As long as the data flow continues to be relatively robust and strong, it gives support to the thesis that the dollar will lead in terms of resilience in the economy, in terms of policy leadership,” Claudio Piron, Bank of America Corp’s co-head of Asia currency and rates strategy in Singapore, said in a Bloomberg Television interview. “Looking at our positioning data as well, it still seems to us that we are having flows continuing to build into the dollar.”
The dollar weakened 0.2 per cent to 113.06 yen as of 3pm in New York, halting a three-day advance. It reached 113.90 earlier, the highest since March 15.
While the greenback paused after its recent rally, there’s room for the currency to advance further against the yen if the difference between the nations’ bond yields, less inflation, is an indicator, according to Kit Juckes, a global strategist at Societe Generale SA in London.
“Dollar-yen will follow real yields, as long as Japanese ones don’t rise faster and as long as global sentiment holds,” Juckes said. “Our target is 120 yen next year.”
The odds that the Fed will tighten at its December meeting are 100 per cent, with the probability of additional moves by June climbing to 65 per cent from 58 per cent at the start of last week.
The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, fell for the first time in four days, having closed Thursday at its highest in data compiled by Bloomberg starting in December 2004. The measure has risen 4.6 per cent since Trump won the November 8 US presidential election.
A gauge of whether asset-price movements have gone too far, too fast is signalling the greenback’s rally maybe overdone. The 14-day relative strength index on Bloomberg’s dollar measure has been above the 70 threshold for 12 days, signalling a reversal to some traders.
“Dollar-yen continues to be the more favourable currency pair to express a US dollar strengthening bias,” said Stephen Innes, a senior trader at Oanda Corp in Singapore. “Price action suggests markets are still under-positioned dollar, as any sell-offs are shallow and running into a wall of buyers.”