USD holds strong as JPY hits lowest level since 1990

On Thursday, the dollar remained strong following hotter-than-expected U.S. inflation data, which dispelled lingering expectations of the Fed initiating its rate-cutting cycle in June. Meanwhile, the yen lingered at levels not seen since the middle of 1990.

Investor focus will now turn to the release of U.S. producer price data and the European Central Bank's policy meeting later in the day. The yen's drop to a 34-year low of 153.24 per U.S. dollar on Wednesday revived concerns about intervention, prompting Tokyo authorities to reaffirm their preparedness to implement measures to manage excessive currency volatility.

In 2022, Japan intervened in the currency market three times as the yen neared a 32-year low of 152 against the dollar.

Thursday saw the yen strengthen by 0.17% to 152.93 per dollar, just slightly below the level of 153.24 reached on Wednesday. This movement was spurred by data indicating that the U.S. consumer price index rose by 0.4% on a monthly basis in March, exceeding economists' forecasts of a 0.3% increase.

The yen is down nearly 8% against the dollar this year, with the currency rooted near 151 per dollar levels since the Bank of Japan last month ended eight years of negative interest rates.

For years, low Japanese rates have positioned the yen as the preferred funding currency for carry trades. In this practice, traders typically borrow a low-yielding currency, then sell it to invest the proceeds in assets denominated in a higher-yielding one.

On Wednesday, Bank of Japan Governor Kazuo Ueda stated that the central bank would not directly react to currency movements when determining monetary policy. This stance dismisses market speculation suggesting that the yen's significant declines might compel the bank to raise interest rates.

In response to the inflation data, traders significantly reduced their expectations for interest rate cuts this year and also pushed back their forecasts for when the Federal Reserve will initiate its easing cycle.

Further casting doubt, minutes from the Fed's March meeting, made public on Wednesday, reveal that policymakers were already concerned by recent inflation readings prior to the release of the latest report.

Currently, markets are indicating an 18% probability of the Fed cutting rates in June, a decrease from the previous estimation of 50% before the CPI data. September is now anticipated as the next potential starting point for rate cuts.

Traders are currently pricing in 43 basis points of cuts for this year, significantly lower than the 75 basis points of easing projected by the U.S. central bank. At the beginning of the year, traders had priced in over 150 basis points of cuts for 2024.

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