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HomeCurrenciesDollar Strengthens, Yen Weakens Amid Diminished Expectations of US Rate Cuts
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Dollar Strengthens, Yen Weakens Amid Diminished Expectations of US Rate Cuts

The dollar maintained its strength on Monday, bolstered by escalating tensions in the Middle East and the likelihood of sustained high U.S. interest rates.

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Last week, the dollar surged by 1.6% against a basket of major currencies, marking its most significant weekly gain since 2022. This upturn came in the wake of a slight but unexpected increase in U.S. inflation figures, casting doubt on expectations of imminent rate cuts. Concurrently, European policymakers hinted at potential rate reductions in the coming months.

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Reaching a five-month peak against the euro on Friday, the dollar continued to trade near those levels early Monday, with the exchange rate hovering around $1.0655 for a euro.

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In contrast, the yen experienced notable depreciation on Monday, hitting a 34-year low at 153.85 against the dollar.

The yen’s decline prompted renewed speculation about potential currency intervention. Japanese Finance Minister Shunichi Suzuki asserted vigilance regarding currency movements and emphasized Tokyo’s readiness to take action if necessary.

Although Iran’s weekend attack on Israel caused market turbulence, including declines in stock markets, bitcoin, and oil prices, the initial reaction in currency markets appeared to be more influenced by diminishing expectations of Federal Reserve rate cuts.

Iran’s warning of a strike on Israel culminated in a weekend assault involving drones and missiles, purportedly in retaliation for an Israeli attack on its Damascus consulate. While causing limited damage, Iran declared the matter concluded.

Despite the ongoing geopolitical tensions, Israeli officials signaled on Sunday that immediate retaliation was not imminent and emphasized the nation’s reluctance to act unilaterally. However, uncertainty looms over the region amid concerns about the potential for broader conflict, while financial markets remain cautious.

Jason Wong, senior market strategist at BNZ in Wellington, remarked, “It is too early to judge. It was really a symbolic attack over the weekend… never really designed to inflict much damage – it’s now over to what Israel’s response will be.”

With a sparse economic calendar for the week, attention is focused on Federal Reserve policymakers’ speeches. Following Wednesday’s higher-than-expected consumer price index (CPI) report, investors have tempered expectations for rate cuts, with the easing cycle now anticipated to commence in September.

Nicholas Chia, Asia macro strategist at Standard Chartered Bank, noted, “It is a data-light week so all eyes will turn to Fedspeak where more than a dozen voting members on the FOMC are likely to emphasize patience after last week’s blowout CPI print.”

The two-year Treasury yield surged above 5% on Thursday, settling at 4.92% most recently.

Last week saw the euro registering its most substantial weekly percentage decline since late September 2022, while sterling experienced its largest weekly drop since mid-July.

Simultaneously, the depreciation of currencies among trading partners has propelled China’s trade-weighted currency index to its highest level since March 2023, indicating a loss of competitiveness.

Bitcoin, experiencing a decline below $62,000 on Sunday, has seen a $10,000 or 15% decrease from its highs a week earlier, though it was last trading at $65,343.

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