Key facts
- The dollar is on track for its largest weekly gain since mid-June, driven by rising oil prices.
- The Japanese yen is set for its biggest weekly percentage decline in over two months.
- Japan's Finance Minister Satsuki Katayama reiterated the government's readiness to intervene in the foreign exchange market.
- The U.S. Treasury Department urged the Bank of Japan to raise interest rates, citing undesirable currency volatility.
- Markets are not expecting a Bank of Japan rate hike at its upcoming policy meeting.
- Rising oil prices due to renewed strikes in the Iran war have rekindled inflation concerns and boosted expectations of a U.S. Federal Reserve rate hike.
The U.S. dollar is poised for its largest weekly gain since mid-June, driven by rising oil prices, while the Japanese yen faces its biggest weekly percentage decline in over two months. The yen is languishing at 40-year lows against the dollar, despite Japan's pledges to support the currency.
Verbal efforts to support the yen have yielded limited results. Japan's Finance Minister Satsuki Katayama reiterated on Friday the government's readiness to take action in the foreign exchange market. However, analysts suggest that intervention by Japanese officials is likely to have only a short-lived effect without coordinated steps, such as more aggressive rate hikes by the Bank of Japan (BOJ).
The U.S. Treasury Department joined calls for rate hikes by the BOJ on Thursday, warning that excessive currency volatility is undesirable. Markets have fully priced out any chance of a rate hike from the BOJ at its upcoming policy meeting, according to LSEG data.
Thierry Wizman, global FX & rates strategist at Macquarie Group, noted that the dollar-yen pair has risen due to the yen being a low-yielding currency facing a terms-of-trade shock with higher oil prices. He suggested that the yen is a target for speculators under such conditions.
The dollar index, measuring the greenback against a basket of currencies, was up about 0.7% for the week, on track for its biggest weekly gain in five weeks. Against the Japanese yen, the dollar was up nearly 0.9% on the week, marking its strongest week against the currency since May 15. On Thursday, the dollar hit 163.98 against the yen, its strongest level since November 1986.
The dollar's recent rise is attributed to renewed strikes in the Iran war, which have caused oil prices to reverse and fanned inflation fears, thereby boosting expectations that the U.S. Federal Reserve may hike interest rates. The U.S. economy is perceived as more insulated from energy price shocks compared to Europe and Japan, which has also supported the dollar.
Michael Feroli, chief U.S. economist at J.P. Morgan, expects the Fed to leave rates unchanged at its next meeting but anticipates at least two hawkish dissents due to above-target inflation.
The euro slipped and was down nearly 0.6% for the week, after the European Central Bank left interest rates unchanged but kept the possibility of a September hike alive. ECB chief economist Philip Lane stated that the central bank views the current inflation shock as medium-sized and expects price growth to return to 2% within the next year.