The US dollar surged to a fresh 34-year high against the yen last Friday (Apr 26), bolstered in part by US inflation data that showed no signs of easing, coming in line with forecasts and affirming expectations that the Federal Reserve will likely delay cutting interest rates to later this year.

The dollar’s peak against the yen came after the Bank of Japan (BOJ) kept interest rates steady at the end of its two-day policy meeting, although it flagged future rate hikes. With the yen at multi-decade lows, market participants were on alert for possible intervention from Japan to prop up its currency.

The dollar hit 157.795 yen, the highest since June 1990, and was last up 1.3 per cent at 157.71. The greenback briefly dropped as low as 154.97 earlier in the session, triggering speculation that the BOJ, which acts on the behalf of the Ministry of Finance, may have checked currency rates, supposedly a sign that the central bank is preparing to intervene.

It was not immediately clear what caused the move.

The greenback was on track for a 2 per cent weekly gain against the Japanese currency, the largest since mid-January.

In the United States, the focus was on inflation.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

The personal consumption expenditures (PCE) price index rose 0.3 per cent in March, compared to a forecast of a 0.3 per cent increase, data showed. In the 12 months till March, PCE inflation advanced 2.7 per cent against expectations of 2.6 per cent.

The PCE price index is one of the inflation measures tracked by the Fed for its 2 per cent target. Monthly inflation readings of 0.2 per cent over time are necessary to bring inflation back to target.

“While the Friday result wasn’t quite as hot as the whisper number, the stark reality is that short-term trends on the Fed’s favoured inflation gauge have steadily headed due north since the start of 2024,” wrote Douglas Porter, chief economist at BMO.

Porter added that the monthly rise of 0.32 per cent prompted a small market sigh of relief, but noted that the figure would have matched the fastest monthly rise in the decade prior to the pandemic.

“That’s hardly going to give the Fed ‘confidence’ that inflation is calming,” Porter wrote.

Post-inflation data, US rate futures have priced in a 58 per cent chance of a Fed cut at the September meeting, down from 68 per cent a week ago, according to the CME’s FedWatch tool. A Fed easing is priced more than 80 per cent in December.

In afternoon trading, the dollar index was up 0.3 per cent at 105.93.

The euro fell 0.2 per cent to US$1.0705. On the week, it was up 0.4 per ent, on pace for its largest weekly rise since early March.

Versus the yen, the euro hit a new 16-year peak of 168.85 yen. It last traded at 168.845, up 1.1 per cent.

On a weekly basis, the single European currency rose 2.5 per cent against the yen, poised for its best showing since mid-June 2023.

Sterling slipped 0.1 per cent to US$1.2501. It rose 1.1 per cent against the dollar on the week, its largest gain since early March.

In Japan, the BOJ left its short-term interest rate target at 0 to 0.1 per cent on Friday and made small upward adjustments in its inflation forecast. Investors had not expected a policy shift but took the decision as confirmation that only small moves lie ahead.

BOJ governor Kazuo Ueda told a press conference after the rate decision that monetary policy did not directly target currency rates, but exchange-rate volatility could have a significant impact on the economy and prices.

“If yen moves have an effect on the economy and prices that is hard to ignore, it could be a reason to adjust policy,” Ueda said.

Currency investors are now focused on the upcoming Federal Open Market Committee (FOMC) meeting, in which the US central bank is expected to hold interest rates steady.

The market is positioned for a hawkish Fed and a stronger dollar given the run of better-than-expected economic data.

Brian Dangerfield, head of G10 FX strategy, US at NatWest, wrote in a research note that the bank believes Fed chair Jerome Powell will not rule out rate hikes, prerequisite for having a data-dependent policy. A rate hike, however, is not the FOMC’s base case, Dangerfield added. REUTERS