By Ritvik Carvalho
LONDON (Reuters) – The dollar soared to its highest in nearly three years versus the Japanese yen on Monday as investors remained confident the U.S. Federal Reserve will announce a tapering of its massive bond-buying next month despite softer U.S. payrolls figures.
Friday’s jobs data pushed U.S. bond yields higher. The yen, which is known for being particularly sensitive to interest rate differentials, hit 113 yen per dollar for the first time since December 2018 in morning London trade.
The Japanese currency was also hurt by a slight tilt towards riskier currencies as sterling and the Australian dollar both gained slightly on the greenback, leaving the dollar’s index only a touch higher at 94.228, but not far from a one-year high of 94.504 touched earlier this month.
“Since the beginning of the summer, dollar-yen has moved in tandem with U.S. and Japan rate spreads,” said Roberto Cobo Garcia, head of FX strategy at BBVA (MC:BBVA).
“The upside pressures in the U.S. curve have pushed the pair to levels not seen since 2018 and not even the correction seen in global equities has prevented the pair from edging higher.”
With Japanese government bond rates well anchored and the Bank of Japan keeping policy on ice, expectations of a Fed tapering announcement soon should press U.S. Treasury yields higher, favouring higher dollar-yen ranges, Garcia said, adding he expects a tapering announcement from the Fed in November.
The yen has also been weighed down by the continued crude oil rally, given Japan is a net oil importer, said Joel Kruger, currency strategist at LMAX, adding the currency was also hobbled by monetary policy divergence between the Bank of Japan and its peers, driving a widening yield differential.
“The yen has seen broad selling pressure for the 3rd straight day,” said Kruger. “This is down to a feedback loop with the Japanese stock rally, while broader sentiment has been lifted by PM Kishida’s capital gains tax comment.”
Japan’s Nikkei 225 stock market index rose for a third straight session on Monday, extending its recovery from a six-week low marked last week, as a sharp decline in the yen boosted exporters while a drop in COVID-19 infections added to economic reopening hopes.
Also underpinning stocks, Japanese Prime Minister Fumio Kishida said on Monday he would prioritise boosting wages through tax incentives, rather than imposing higher levies on capital gains and dividends to address Japan’s income gap.
U.S. currency and fixed income markets are closed on Monday for a holiday but the yield on benchmark 10-year Treasuries hit a four-month high of 1.617% on Friday, even after data showed the U.S. economy created the fewest jobs in nine months in September, missing forecasts.
However, data for August was revised up sharply and the jobless rate dropped to an 18-month low, suggesting fears of labour shortage remain justified, keeping worries about inflation alive and giving the Fed justification to reduce its emergency stimulus begun last year.
The Australian dollar firmed a little, edging nearer to its highest in a month, helped by strong commodities prices and a partial reopening of Sydney, Australia’s largest city.
Concern about inflation is not limited to the United States, with supply disruptions and rising commodity prices affecting many countries.
The British pound held firmer at $1.3624, extending its recovery from a nine-month low set late last month, on growing expectations the Bank of England could raise interest rates to curb inflation.
The Canadian dollar changed hands at C$1.2456 per U.S. dollar, having hit a two-month high of C$1.24465 thanks to surprisingly strong Canadian payrolls data and lofty oil prices.
Meanwhile, the euro was softer at $1.1575, hovering a tad above Wednesday’s low of $1.1529, its weakest since July last year.
In cryptocurrencies, bitcoin gained 3.5% to a new five-month high of $57,092, extending gains made over the weekend, while ether also rose 5% to $3,620.