Dollar Falls Against The Yen With Treasury Yields

On Thursday, the US dollar dropped against the yen to a low of six weeks, as Treasury yields also declined.

This was after data showed that the US economy had declined again in the second quarter, which fanned expectations that the US Federal Reserve may not stick to its aggressive tightening.

Dollar declines

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The US dollar declined against the yen by the biggest percentage drop in a day since mid-March two years ago.

Two-year yields in the US Treasury market also fell to a three-week low, which is often a reflection of interest rate expectations.

The two-year yield had reached its peak back on Wednesday, but it had since recorded declines by 24 basis points.

On Thursday, data showed that there was a 0.9% drop in the gross domestic product in the second quarter.

Moreover, there was a fall in business spending and the increase in consumer spending was at its lowest in the last two years, fueling risks that the economy was at the brink of recession.

Experts had expected the GDP to rebound at a rate of 0.5%. On Thursday, Janet Yellen, the US Treasury Secretary, said that a possible recession could not be ruled out.

However, she refused to admit that there was already a recession underway, even though economists’ definition indicates it is because GDP has declined for two consecutive quarters.

Rate hike

The GDP data came a day after the interest rate was increased by the US Federal Reserve by 75 basis points in order to curb soaring inflation.

This latest hike, combined with the earlier ones made in March, May, and June, has seen the overnight interest rate of the central bank go from almost zero to between 2.25% and 2.50%.

This is the fastest monetary policy tightening seen since the 1980s when former Fed chairman Paul Volcker had to deal with double-digit inflation.

Market analysts said that the decline in GDP shows that the economy is slowing and software growth would eventually lead to softer inflation.

Dollar weakness

Once inflation declines, it is expected that the Fed would put an end to its tightening cycle and this would probably result in further weakness in the dollar against the yen.

This is because the particular currency pair tracks the US interest rate and inflation expectations the closest.

Afternoon trading saw the dollar drop by 1.7% against the yen to 134.22, after it had plunged earlier to a six-week decline of 134.20 yen.

On Thursday, Fed fund futures had priced in a lower interest rate by the end of December at 3.25%, as compared to a 3.4% rate before the announcement on Wednesday.

Before the announcement, the cumulative tightening factored in by the end of the year had been 108 basis points, but this was also adjusted to 92 basis points.

A 76% possibility of an interest rate hike of 50 basis points has been priced in for the next meeting of the Fed in September.

The greenback had declined on Wednesday after the announcement, as the hike had already been anticipated.

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