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Dollar Touches One-Week High Against Yen as Bond Yields Rise and Chinese Growth Anticipated

The dollar reached its highest point in over a week against the yen on Wednesday due to an increase in Treasury yields and the expectation of a recovery in Chinese growth as COVID-19 restrictions ease.

100 Dollar and 10.000 Yen Notes
100 Dollar and 10.000 Yen Notes

The yen also faced pressure after the Bank of Japan indicated that its unexpected policy shift last week did not signify the start of a wider withdrawal of monetary stimulus. The dollar rose as much as 0.67% to 134.40 in Asian trading, its highest point since December 20th, when the BOJ caused the pair to plummet with an unexpected loosening of the 10-year Japanese government bond yield policy band. The yen saw its biggest one-day rally against the dollar in 24 years that day, closing 3.8% higher as traders speculated about a potential unwinding of stimulus.

BOJ Confirms Last Week's Surprise Policy Shift was a One-Off

A summary of opinions from the latest BOJ meeting, released Wednesday, showed policymakers supporting the continuation of ultra-accommodative policy, even as they discussed the growing likelihood of higher wage growth and sustained inflation in the country next year.

Osamu Takashima, head of G10 FX strategy at Citigroup Global Markets Japan, stated that "it basically confirmed that the BOJ surprise from last week was a one-off, but from a longer-term viewpoint, nobody believes it." Takashima expects the dollar yen to fall through 130 in the second half of next year. However, he added that "in the near term, dollar-yen is bouncing back... Now, the market is expecting a solid recovery in the Chinese economy," and those hopes have greatly boosted bond yields, lifting the dollar-yen.

10-Year Treasury Yield Affects Dollar-Yen Pair

The 10-year Treasury yield, which tends to have a high correlation with the dollar-yen pair, was at 3.8316%, down three basis points, after reaching a six-week high of 3.862% the previous day. The dollar index, which measures the value of the dollar against six major currencies, rose 0.1% to 104.31. It reached a six-month low of 103.44 two weeks ago when the Federal Reserve slowed interest rate hikes to a half-point pace. Fed officials, including Chair Jerome Powell, have emphasized since then that policy tightening will be prolonged, with a higher terminal rate, causing concerns about a potential U.S. slowdown.

China's Dismantling of Zero-COVID Policies Complicates Markets

China's rapid dismantling of its strict zero-COVID policies, which have severely impacted its economy for nearly three years, has complicated markets in the final weeks of the year. Investors must reconcile the increase in economic activity as China's consumers and businesses return to some level of normalcy with the impact of a surge in infections on the recovery. DailyFX analyst David Cottle noted that "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."

Dollar in a 'Conundrum' as U.S. Recession and Global Recession Both Pose Threats

Bart Wakabayashi, a branch manager at State Street in Tokyo, commented that "the dollar is in a very interesting situation." He explained that "if we have a recession in the U.S., the Fed will have to cut rates, and obviously, you will want to sell the dollar. At the same time, if there's a global