The yen retreated on Friday from a 2-1/2 month high hit on a jump in Japanese inflation, while the dollar was set for its third weekly drop in a row as traders calculated the start of Donald Trump‘s second term has been mostly bluster on the tariff front.
The yen broke through chart resistance at 150 per dollar overnight and strengthened as far as 149.285 per dollar, and Japanese government bonds were sold off after national core inflation hit a 19-month peak in January, buoying expectations for more interest rate increases in Japan.
But the yen pulled back sharply and bond yields declined after Bank of Japan (BOJ) chief Kazuo Ueda said the central bank could step up government bond buying if long-term interest rates jump.
The euro was up 0.8% overnight and steadied in Asia around $1.0493, with traders awaiting an election in Germany on the weekend where polls point to a conservative coalition win.
The dollar nursed broad losses as bulls who had built up big long positions in anticipation of a trade war have backed off while Trump equivocates about tariffs.
Trump has slapped an additional 10% tariff on Chinese goods and announced plans to reimpose steel and aluminium levies from his first term, but suspended threatened tariffs on Canada and Mexico while numerous others remain – as of yet – only threats.
“It was a very one-sided trade and very heavy long positioning,” said Jason Wong, strategist at BNZ in Wellington.
“Some of those longs are becoming impatient because the only thing he has done is put (a) 10% (tariff) on China – so the market is taking some of that money off the table.”
Wong said evidence that Japan’s inflation was picking up – the core consumer price index rose to an annual 3.2% against expectations for 3.1% – also bolstered the case for higher Japanese rates at a time when the rest of the world might be cutting, and so was buoying the yen.
The yen has gained around 3.2% on the dollar through February so far. Another quarter-basis point rate hike isn’t fully priced in until September, although interest rate markets have factored in a slight chance of a hike as soon as May .
But the Japanese currency tumbled in the wake of BOJ Governor Ueda’s bond buying remarks to as low as 150.73 per dollar before paring some losses. The dollar was last up 0.58% at 150.51 yen.
Yen weakness on Friday was likely more due to profit taking rather than a reassessment of rate-hike bets after Ueda’s comments, but the upside for yen below 150 per dollar appeared limited for the time being, said Nomura Securities currency strategist Jin Moteki.
“BOJ officials could push back market expectations” if rate-hike pricing becomes too aggressive, while the risk remains that additional U.S. tariffs may boost the dollar, he said.
SOURCE; REUTERS
