By Kevin Buckland and Greta Rosen Fondahn
TOKYO (Reuters) – The dollar strengthened on Friday as the holiday-shortened trading week came to a close, while the yen lingered near a five-month low. Traders are weighing the diverging signals from a hawkish U.S. Federal Reserve and a more cautious Bank of Japan.
Market participants are increasingly betting on U.S. interest rates remaining elevated for an extended period, which has led to rising Treasury yields and subsequently supported the dollar against other key currencies.
The dollar index, which compares the U.S. currency to six others, including the yen, euro, and pound, rose by 0.07% to 108.16. It has remained relatively stable around the 108 mark this week after reaching a two-year high of 108.54 last Friday.
This month, Fed Chair Jerome Powell indicated that officials at the U.S. central bank would approach any further rate cuts “cautiously” following a widely anticipated quarter-point reduction.
For the month, the dollar index has increased by 2.2%, contributing to a year-to-date gain of 6.6%.
Conversely, the Bank of Japan has been hesitant to raise borrowing costs amidst uncertainties surrounding U.S. President-elect Donald Trump’s economic plans. This caution has weighed on the yen, which fell to its weakest point since July 17, hitting 158.09 per dollar on Thursday.
The yen received little relief from a recent warning issued by Japan’s finance minister, who stated that the government is “alarmed by foreign exchange developments” and will respond appropriately to excessive fluctuations.
This year, Japanese officials have intervened to support the yen, but the currency is on track for its fourth consecutive annual decline.
As of 0915 GMT, the yen was trading flat at 157.79 per dollar, remaining close to Thursday’s lows.
A summary from the BOJ’s December policy meeting released on Friday revealed mixed feelings among officials, with some showing increased confidence about a rate hike in the near term, while others expressed caution due to uncertainties related to wage trends and Trump’s policies.
Last week, BOJ Governor Kazuo Ueda remarked that it would take “considerable time” to fully assess the outlook for wages and international economies, particularly the U.S.
Economists view Trump’s proposed deregulation, tax cuts, tariff increases, and tighter immigration policies as both stimulative to growth and potentially inflationary.
The dollar is poised for a 5.4% increase against the yen this month and has experienced a 12% advancement this year.
However, Sydbank analysts note that some market participants believe the upward trajectory of dollar/yen may be overstated, raising the risk of a correction.
Furthermore, Japanese authorities have hinted at potential intervention if there are rapid and substantial increases in the dollar/yen exchange rate.
DECEMBER RETREAT
Other major currencies faced challenges against the stronger dollar.
The euro dipped 0.1% to $1.0411, looking at a 1.5% decline for December, while sterling remained stable at $1.2524, on track for a 1.7% decrease this month.
The Chinese yuan ended the week near a 13-month low, trading at 7.2994 per dollar in the onshore market, affected by the potential for more U.S. tariffs on Chinese imports under Trump’s administration.
In South Korea, the won fell to a 16-year low of 1,486.7 per dollar following the impeachment of acting President Han Duck-soo, which deepened the political turmoil in the country.
Bitcoin surged by 1.3% to $97,069, although it remained relatively unchanged for the month after retreating from an all-time high of 108,379.28 reached on December 17. The cryptocurrency has surged approximately 128% this year.
