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Yen Poised to Unwind Pandemic-Driven Gains on Policy Divergence

Fed-Driven Binge for Dollar Assets Sends Yen to Pandemic Lows

The yen looks poised to unwind an advance spurred by demand for haven asset during the pandemic, with traders betting the Bank of Japan will fall behind the Federal Reserve in tightening policy as global the economy recovers.

The Japanese currency depreciated to 111.12 per dollar on Thursday, the weakest since March 2020. Traders are positioning for the Fed to raise rates twice by the middle of 2023 after the central bank took a hawkish tilt last week. The BOJ is expected to maintain its ultra accommodative stance.

The divergence is piling pressure on the yen, which has weakened against all its Group-of-10 peers this year as vaccine rollouts accelerate across the world, driving investors into riskier and higher-yielding assets. A break above 112.23 per dollar would push it to a level last seen in April 2019.

Yen Poised to Unwind Pandemic-Driven Gains on Policy Divergence

“Sovereign divergence is coming back into play,” said Neil Jones, head of foreign-exchange sales to financial institutions at Mizuho Bank Ltd. in London. “The BOJ stands on hold while other G-7 central banks are pushing rates higher.”

Japan’s currency may extend declines to 115 per dollar, Jones said, the weakest level since March 2017. It was trading little changed on the day at 110.88 per dollar as of 10 a.m. in London, snapping a three-day losing streak, after sliding as much as 0.2% earlier.

MUFG Bank Ltd. has a bullish bias in dollar-yen, saying the Fed is the dominant influence for the currency pair. The central bank signaled a faster pace of tightening than some had expected last week, driving two-year Treasury yields to 0.28%, the highest since April 2020.

That compares with a yield of minus 0.11% and minus 0.66% on Japanese and German equivalents. The repricing in the rates market has helped propel a dollar rally, with the Bloomberg Dollar Spot Index rising 2% in June, set for the biggest monthly gain since March 2020.

“The window of U.S. dollar strength opened by the Fed last week is perhaps with us over the coming weeks,” MUFG strategists Derek Halpenny and Lee Hardman wrote in a note to clients.

©2021 Bloomberg L.P.