Dollar Ticks Higher as Hype Builds Around Yen

The dollar was higher on Wednesday, following Federal Reserve Chair Jerome Powell’s hint that more interest rate hikes would be coming soon in the United States.  The dollar hit a three-year low on February 16 after a spike in Treasury yield prices and a consensus by analysts that the currency was oversold.  Analysts remain dubious whether today’s bounce is a result of renewed optimism or simply a small uptick amid the currency’s continued struggles.  The dollar was up slightly against the euro to $1.2215 as of 9:45 a.m. GMT and was trading at 107.11 against the yen. 

Despite the renewed interest in the greenback, traders have turned their attention to the yen which has been appreciating quickly since the start of 2018, driven by the weaker dollar and the country’s rapidly expanding economy.  Japan posted eight straight quarters of growth in Q4 2017, the longest expansion streak in close to 30 years.

The dollar-yen pair is down over 4 percent since the start of the year, and analysts expect a continued strengthening of the yen.  Analysts at Morgan Stanley have predicted that the pair could fall as low as 101 by the end of the year, after starting the year at 112.64. 

Speaking on Wednesday, Bank of Japan Governor Haruhiko Kuroda addressed his plans to normalize monetary policy ‘gradually’ and that the central bank would be paying careful attention to risks to the economy.  Kuroda told the lower house of parliament that the BOJ would pause its aggressive monetary easing policy once inflation targets are met and the economy is growing stably.  Still, despite these sentiments, skeptics are concerned that cancelling the monetary easing policy won’t be done anytime soon considering that core consumer prices are lagging behind their targets and the BOJ continues to buy government debt, keeping the 10-year yields near zero.  These analysts argue that it will require significant forethought and long term planning to reverse these policies, and that for now, Kuroda’s plans are all talk.