Dollar Drops Most in Two Months as Yuan, Yen Rally on Pushback

The US dollar fell by the most in two months after China and Japan signaled a willingness to take steps that would bolster their currencies, triggering a sharp jump in the yuan and the yen.

(Bloomberg) — The US dollar fell by the most in two months after China and Japan signaled a willingness to take steps that would bolster their currencies, triggering a sharp jump in the yuan and the yen.

The moves snapped what had been one of the longest rallies in the dollar in years as the surprisingly strong US economy fueled speculation the Federal Reserve will keep interest rates above those in other countries. Despite Monday’s retreat, analysts expect that interest-rate gap to continue putting upward pressure on the dollar and cautioned on betting against the currency. 

“As long as monetary policy divergences remain, the direction for the dollar will be higher,” said Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. in New York. “Jawboning and intervention can cause temporary corrections but not any trend changes.” 

Such comments had a immediate impact Monday, however, as traders weighed what steps Japan and China may take that would prevent their currencies from losing further ground. 

The yen advanced as much as 1.3% against the dollar to 145.91, the most in two months, after Bank of Japan Governor Kazuo Ueda aired the possibility of ending the nation’s negative interest-rate policy, pushing 10-year bond yields there to the highest since 2014. 

Meanwhile, the Chinese yuan climbed as much as 1.2% in onshore trading as the nation’s financial regulators delivered a strong message to speculators against “one-sided moves,” pulling it away from a 16-year low. Economic data that confirmed improving credit demand and easing deflationary pressures also brightened sentiment toward China’s currency. 

The moves helped to push the Bloomberg dollar spot index down over 0.6%, ending an eight-week gain that marked its longest winning streak since the index’s inception in 2005. All 16 of the major currencies tracked by Bloomberg gained against the dollar. 

Still, the dollar gauge remains not far off this year’s peaks and the diverging economic outlooks that have driven the currency’s rise remain intact.

The broad move up in the dollar was fostered by anticipation the Fed will hold interest rates high to prevent another pickup in inflation as the economy defies once-gloomy forecasts. With signs of growth sputtering in Asia and Europe, where rates are already lower in major countries, the difference has provided an incentive for speculators to shift cash to the US to capture higher returns. 

Any short-term moves in the US currency are also at risk of being reversed by Wednesday’s release of the consumer-price index, which could prompt a reconsideration of where the Fed is headed. 

“It’s dangerous to be short dollars going into this week’s data dump,” said Thin. 

Even those who are bullish on the yen in the medium term are suggesting caution. UBS Global Wealth Management forecasts that the Japanese currency — now over 146 to the US dollar — will climb toward 142 by year-end. But the firm advised investors to focus on the yen’s advance against the euro or the pound for the moment instead of the dollar, citing potential volatility in the US currency because of the inflation data and the Sept. 20 Fed decision. 

“We do not advise adding new long yen positions against the dollar right now,” the firm said in a report on Monday.  

For the Chinese yuan, which had been dragged down by a pessimistic economic outlook, the data showing improved demand for credit helped to foster the rebound Monday. While Tiffany Wang, a Hong Kong-based strategist at JPMorgan Chase & Co., sees room for the yuan to appreciate further against the dollar — in part due to the covering of short positions — she said in a note to clients that the bar for a trend reversal “looks high.”

That would likely require a sustained influx of foreign cash again, which has yet to happen. 

Bipan Rai, CIBC’s global head of foreign exchange strategy in Toronto, added that China’s reported steps to tighten capital controls “ultimately isn’t going to drive sustained push lower” for the dollar. 

–With assistance from Anya Andrianova and Carter Johnson.

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