Dollar scales fresh two-decade peak to yen as BOJ targets yields

Highlights:

• Yen sinks to cusp of 130 per dollar, Swissie hits 22-month low
• Bank of Japan steps in to keep benchmark yield near zero
• By contrast, ever more Fed officials back big rate hikes

The dollar climbed to a fresh two-decade peak to the yen on Wednesday, buoyed as the Bank of Japan stepped into the market again to defend its ultra-low interest-rate policy, in contrast with ever more Federal Reserve officials pushing for sizeable rate hikes.

The greenback reached 129.43 yen for the first time since April 2002 before easing to last trade 0.21% lower at 128.615.

"The morning announcement by the BOJ caused dollar-yen to spike higher, and so after that I think it just sort of pulled back, but I expect it will resume its course (higher)," said Bart Wakabayashi, Tokyo Branch manager of State Street Bank and Trust.

"It really highlighted what is really the core of all of this, which is the diverging interest rate story between the US and Japan."

The BOJ again offered to buy unlimited amounts of Japanese government bonds to rein in the rise in Japanese 10-year yields, which were butting against its 0.25% tolerance ceiling.

The policy divergence has led many analysts to say the yen's rapid descent is not unjustified, even as it raises risks for currency intervention.

Japanese Finance Minister Shunichi Suzuki made the most explicit warning yet on Tuesday, saying the damage to the economy from a weakening currency at present is greater than the benefits from it. 

The dollar's rally against the yen has come as US Treasury yields push higher, with 10-year yields touching 2.981% for the first time since December 2018 in Tokyo trading.

"Amid the ongoing rise in US Treasury yields, actions clearly speak louder than words," with Suzuki's comments "thus continuing to go unheeded," Ray Attrill, head of foreign-exchange strategy at National Australia Bank, wrote in a client note.

"Incoming Fed speak has done nothing to detract from the ongoing bond sell-off."

Minneapolis Fed President Neel Kashkari, among the more dovish Federal Open Market Committee (FOMC) members, said on Tuesday that if global supply chain disruptions persist, policymakers will need to take even more aggressive action to bring down inflation. 

Earlier, Chicago Fed President Charles Evans, who is not a voter on this year's FOMC, said he is "comfortable" with a round of rate hikes this year that includes two 50 basis-point increases, marking an about face from just a month ago. 

The dollar index , which measures the currency against six major peers including the yen, early in the day matched Tuesday's high at 101.03 - a level not seen since March 2020 - before easing to 100.76.

The greenback touched 0.9535 franc for the first time since June 2020 before changing hands slightly weaker at 0.9513.

The euro added 0.22% to $1.0812, still not far from last week's low of $1.0758, the weakest in about two years.

The Australian dollar jumped 0.58% to $0.7420, continuing its bounce from a one-month low at $0.7343 reached on Monday, after minutes of the Reserve Bank of Australia's latest meeting showed on Tuesday that the first rate increase in more than a decade had been "brought forward" by accelerating inflation and a tightening labour market. 

Elsewhere, China surprisingly kept its benchmark lending rates for corporates and households steady on Wednesday, going against the global trend of monetary tightening as major economies battle inflation. 

The Chinese yuan hit its weakest level since October 2021 at 6.4115 to the dollar.