As traders increased their wagers that the Bank of Japan could make additional adjustments to its yield management policy at its session this week, the dollar dropped to a seven-month low versus key rivals on Monday, while the yen soared to a more than seven-month high.
After reaching a high of $0.7019 earlier in the session, the Australian dollar broke above the crucial $0.7000 threshold for the first time since the month of August and last increased by 0.29% to $0.6995.
The euro also reached a new nine-month high of $1.0874 and last traded 0.23% ahead at $1.08565.
The U.S. dollar index sank to a seven-month low of 101.77 against a range of currencies as the dollar continued to decline from last week’s lows after data revealed that U.S. consumer costs fell in December for the first occasion in more than 2-1/2 years. The index last moved down 0.3% to 101.95.
Investors are reportedly growing more convinced that the Fed is reaching the conclusion of its rate-hike cycle and that rates will not go as high as originally feared due to the world’s largest economy and its reputable decades-high and lasting inflation showing signals of cooling.
Experts at OCBC believed the confirmation of a slowdown in price pressures is raising expectations for more CPI declines in the upcoming months.
An established trend of deflation can support predictions that the Fed will slow down the rate of hikes after the February FOMC meeting or possibly prepare for an early halt or dovish shift.
The Fed’s rapid rate hikes last year were a major factor in the 8% gain in the value of the dollar.
When the Fed delivers its policy decisions in February, the markets are currently pricing in a 91% probability of a 25-basis point increase and a 9% likelihood of a 50-bps increase.
The market’s expectations that the BOJ will make additional adjustments to, or completely abandon, its yield control legislation when it delivers its economic policy decision on Wednesday sent the yen to a more than seven-month high on Monday.
The yen increased by almost 0.5% to a peak of 127.215 per dollar and last traded at 127.67.
According to Ray Attrill, lead of FX strategy at the renowned National Australia Bank, Wednesday will be the centre of attention for the entire world, and what occurs to the yen and yen swaps will likely define the week for G10 currencies (NAB).
It’s unlikely that the BOJ will have the leeway time they want to declare that they would evaluate the situation and wait till Q2 or until Kuroda’s term is over before making any additional modifications.
Haruhiko Kuroda, the current governor of the BOJ, will retire in April.
The BOJ has come under pressure from investors to change its ultra-accommodative monetary policy, which has allowed the yield on Japan’s standard 10-year government bonds to move beyond the new ceiling for 2 sessions.
The yen fell 12% last year as a result of the BOJ’s yield curve management policy, and since the central bank’s unexpected move to broaden the range around its yield target in December, the yen has increased by more than 6%.
The British pound, which had earlier reached a one-month high of $1.2288, was recently 0.23% higher at $1.2262.
The kiwi increased by 0.34% to $0.64065 during the session after earlier reaching a one-month high of $0.64255.
Due to a holiday, U.S. markets are off on Monday, which results in light trade.
The International Monetary Fund (IMF) stated in a new staff analysis that severe fracturing of the global economy following decades of increased economic integration might lower global economic production by up to 7%, although the losses could reach 8–12% in some nations.
Even minor fragmentation, according to the IMF, may reduce the global GDP by 0.2%, but it said that additional research was necessary to determine the anticipated consequences to the international monetary system as well as the global financial safety net (GFSN).