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The Yen falls to its lowest level since 1998 as U.S. yields rise

Image: Reuters Berita 24 English -  The yen fell to its lowest level against the dollar in 24 years on Monday, as the gap between Japanese a...

Image: Reuters

Berita 24 English -  The yen fell to its lowest level against the dollar in 24 years on Monday, as the gap between Japanese and U.S. benchmark yields expanded following the release of scorching inflation data in the United States, which pushed up U.S. Treasury yields.

The dollar reached 135.22 yen, its highest level since October 1998, and has risen in each of the past seven sessions as the policy divergence between aggressive foreign central banks and the dovish Bank of Japan (BOJ) continues to widen.

This week's focus will continue on the attempts of central banks to increase interest rates to combat inflation. The Federal Reserve, the Bank of England, and maybe the Swiss National Bank are expected to hike interest rates at their upcoming meetings.

The BOJ announced on Monday that it would purchase 500 billion yen ($3.70 billion) of Japanese government bonds on Tuesday as part of its programme to maintain benchmark 10-year rates within 0.25 percentage points of its 0 percent goal.

In comparison, the benchmark 10-year U.S. yield reached 3.2% on Monday morning after gaining roughly 12 basis points on Friday.

The U.S. two-year yield extended Friday's gains to its highest level since late 2007 when it reached 3.194%. [US/]

On Friday, U.S. inflation exceeded estimates, prompting wagers that the Federal Reserve will have to hike rates even more aggressively. According to the CME's FedWatch tool, market pricing shows a nearly two-thirds possibility of at least 125 basis point rises at the Fed's next two sessions, on Tuesday and Wednesday this week and in July.

This entails at least one 75-basis-point rise, which would be the largest single-meeting increase since 1994.

In addition to harming Japan's balance of payments, higher energy prices have weighed on the yen.

"For the yen, everything that could have gone wrong has gone wrong, and continues to go wrong," said Paul Mackel, global head of FX research at HSBC, adding that it was vital to monitor if Japanese investors were willing to take on further unhedged currency risk.

"The most important factor at this time is whether domestic corporations will begin to alter their so-called FX hedge ratio, which could result in a more persistent demand for foreign exchange versus the Japanese yen. If so, this keeps the currency on a path of depreciation or prevents it from strengthening."

Monday's losses follow a brief yen rebound late on Friday, when Japan's government and central bank expressed alarm over the currency's recent severe dips. This uncommon joint statement was viewed as the strongest indication to date that authorities could act to strengthen the yen.

The dollar appreciates versus currencies other than the yen due to expectations of a more aggressive Fed. The dollar index, which measures the greenback relative to six other currencies, rose 0.3% to 104.58, its highest level in four weeks.

The euro was languishing at $1.0490, down 0.23 percent, and the pound was 0.23 percent weaker at $1.2287, receiving little assistance from predictions that the Bank of England will raise interest rates on Thursday, which would be its fifth increase since December.

The Swiss National Bank is expected to raise rates by 25 basis points when it meets on Thursday.

The risk-friendly Australian dollar fell as much as 0.6% to $0.6998, a three-and-a-half week low, as investors sought perceived safer assets out of concern for the impact of increased interest rates.

Bitcoin, another so-called risky commodity, was also under pressure and fell to a fresh 18-month low of $24,888 when cryptocurrency lending service Celsius Network announced it would halt withdrawals and transfers between accounts owing to "extreme market conditions."

($1 = 135.0200 yen)

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