Dollar hits one-week high vs yen amid reset in investor expectations

U.S. one hundred dollar notes are seen in this picture illustration
U.S. one hundred dollar notes are seen in this picture illustration taken in Seoul February 7, 2011. REUTERS/Lee Jae-Won

WASHINGTON, Dec 28 (Reuters) - The dollar touched a one-week high against the yen on Wednesday, boosted by a jump in Treasury yields and investor expectations for a rebound in Chinese growth as COVID-19 curbs loosen.

The dollar rallied by as much as 0.67% against the yen to 134.40 in Asian trading, the most since Dec. 20, when the Bank of Japan sent the pair spiraling lower with an unexpected loosening of the 10-year Japanese government bond yield policy band.

That day, the yen staged its biggest one-day rally against the dollar in 24 years, closing 3.8% higher, as traders speculated about an eventual unwinding of stimulus.

But a summary of opinions from the meeting, released on Wednesday, showed policymakers backing a continuation of ultra-accommodative policy, even as they discussed improving prospects for higher wage growth and sustained inflation next year.

The dollar was last up 0.55% against the Japanese yen at 134.240.

If yields on Japanese government bonds remain steady, there will likely be no further pressure on the BOJ "to take another step," said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York.

"They can just continue to reiterate what they said at the press conference: this is just a minor technical adjustment. We've done it before; nothing to see here, folks," he said.

Throwing a wrench in the works for markets in the final week of the year is China's rapid dismantling of the strict zero-COVID policies that have severely hampered its economy for nearly three years.

Investors are having to reconcile the pick-up in economic activity as China's consumers and businesses return to some kind of normality while also dealing with the impact of a surge in infections.

"With infection levels running at many thousands per day, it’s little wonder that China’s COVID response should top many analysts’ list of concerns about 2023," said DailyFX analyst David Cottle.

Elsewhere, the Australian dollar rose 0.22% against its U.S. namesake to $0.674, while the New Zealand dollar strengthened by 0.65% to $0.632.

The commodity currencies "are reacting a little bit to the recent uptick in oil, but that's about it," said Brad Bechtel, global head of FX at Jefferies.

"In the square-up process that we're going through, probably those currencies have room to drift stronger, still," said Anderson.

The dollar index , which measures the U.S. currency against six major rivals, rose 0.202% to 104.420. It hit a six-month low of 103.44 two weeks ago, when the Federal Reserve slowed the pace of its interest rate increases.

Sterling rose by as much as 0.63% on Wednesday against the dollar to 1.211, as Britain's markets reopened after a long weekend, before leveling out. The pound last fell 0.02% against the dollar at 1.203.

The euro was down by 0.18% at $1.06225, having traded steadily around six-month highs in the couple of weeks since European Central Bank President Christine Lagarde said that rate hikes would need to continue.


Currency bid prices at 2:10PM (1910 GMT)

Reporting by Hannah Lang in Washington; Additional reporting by Amanda Cooper in London and Kevin Buckland; Editing by David Goodman, Tomasz Janowski and Chizu Nomiyama

Our Standards: The Thomson Reuters Trust Principles.

Thomson Reuters

Hannah Lang covers financial technology and cryptocurrency, including the businesses that drive the industry and policy developments that govern the sector. Hannah previously worked at American Banker where she covered bank regulation and the Federal Reserve. She graduated from the University of Maryland, College Park and lives in Washington, DC.