The Yen Surges to Nine-Week High on Rate Hike Bets
The Japanese yen ascended to a nine-week apex as market participants ramped up wagers on further interest rate increments in Japan this annum. Concurrently, the U.S. dollar and other significant currencies remained relatively stable in anticipation of the forthcoming U.S. monthly payroll figures.
After a turbulent week characterized by volatile market-influencing headlines regarding U.S. tariff threats, traders adopted a cautious stance in preparation for the U.S. employment data. Geopolitical uncertainties and the comprehensive policy initiatives of U.S. President Donald Trump also remained under close observation.
The resilience of the U.S. labor market has persisted. Economists surveyed by Reuters anticipate the unemployment rate to remain unchanged at 4.1% in January, while projecting an increase of 170,000 jobs. However, analysts caution that the employment data for January might be challenging to decipher.
Commerzbank analysts emphasized that "substantial revisions" to population growth made by the U.S. Census Bureau in December could "complicate the market's reactions." They noted in a research note to clients, "We could witness significant revisions in the monthly employment data."
On Thursday, Dallas Fed Bank President Lorie Logan indicated her willingness to maintain interest rates on hold for "quite some time," even if inflation approaches the Fed's 2% objective, provided that the labor market does not falter.
The dollar index, which measures the U.S. currency against the yen, sterling, and other key counterparts, remained stable at 107.69 after peaking at 109.88 earlier this week due to U.S. tariff threats.
The yen experienced its own momentum fueled by expectations of sustained rate increases by the Bank of Japan. The dollar declined by 0.25% against the yen to 151.09 after the currency pair fell below 151 for the first time since December 10 during early Asian trading.
The yen is poised for its strongest performance against the dollar since late November due to the persistent rate-hike driven momentum, supported by wage data earlier this week. Reinforcing the expectations of higher rates were comments by Bank of Japan board member Naoki Tamura, one of the board's most hawkish members. On Thursday, he stated that the central bank must raise rates to at least 1% in the latter half of fiscal year 2025.
Barclays strategists Shinichiro Kadota and Lhamsuren Sharavdemberel anticipate further depreciation of the dollar/yen pair in the near term, with attention centered on the outcomes of Japan's wage negotiations. In a note, they stated, "We anticipate Japan's annual spring wage negotiations to yield another robust 5% increase this year, while inflation remains above the 2% target. This should sustain the hawkish stance of the BOJ."
Elsewhere, the initial stages of the Trump administration have maintained investor trepidation. While Trump suspended planned tariff measures against Mexico and Canada this week, additional 10% levies were imposed on imports from China. The Federal Reserve's officials are considering these developments as they deliberate on the course of monetary policy.
Markets currently assign a 43% probability to the Fed executing a quarter-point reduction in July, according to the CME FedWatch tool. Investors contemplate a total of two rate cuts in 2025, with approximately 44 basis points of cuts already factored in.
The euro traded largely unchanged at $1.0382, while sterling marginally declined by 0.1% to $1.2426. The Bank of England projected higher inflation and sluggish growth at the conclusion of its monetary policy meeting on Thursday, with two policymakers advocating for a more profound rate reduction.