Stocks are down largely because of monetary policy tightening, soaring inflation, and the risk of a global recession. Last week, the Fed raised the key rate by 0.75 basis points, signaling more hikes until the end of the year 2022 and possibly in 2023. Several Fed policymakers are scheduled to deliver speeches. They are likely to confirm more aggressive rate increases in the future.
Boston Fed President Susan Collins believes that inflation is "near peaking or has peaked already." Dallas Fed President Lorie Logan has a different point of view. He assumes that inflation is still too high.
Cleveland Fed President Loretta Mester made hawkish remarks on Monday, saying that inflation is "unacceptably high" and it is better to act more aggressively.
Fed Atlanta President Rafael Bostic is optimistic. He supposes that the economy will be able to cope with higher interest rates as well as other measures the Fed could take to push inflation to the 2% target. "We need to get inflation under control. Until that happens we're going to see volatility in the marketplace in all directions," he pinpointed.
The US dollar index jumped to 114.58, a high of May 2020, amid Fed members’ hawkish comments. Today it slightly decreased to 113.64 after a rally in the previous sessions.
At the same time, the 10-year government bond yield rose to 3.9%, the highest level in a decade. Some analysts consider long-term US Treasuries to be one of the most reliable assets now.
Buoyant demand for safe haven currencies is also pushing the US dollar higher. Traders are unwilling to buy risk assets due to the gloomy prospects of the global economy and the risks of a recession. Early on Tuesday, the greenback halted its bull run as investors locked in profits after a rapid rally.
In the Asian session, the US dollar was trading in the price corridor of 113.33-114.03 not far from the peaks reached earlier. Now, the US dollar is hovering at an all-time high versus its main rivals amid expectations for more aggressive rate hikes.
The yen seems to be playing cat and mouse with the US dollar. Last week, the BoJ intervened in the foreign exchange market for the first time since 1998 to prevent the yen from falling below 145.
Last week at the close of the Asian session on Thursday, the Ministry of Finance ordered the Bank of Japan to intervene. The BoJ used the country's foreign exchange reserves to sell the US dollar and buy back the yen. As a result, the yen/dollar pair drastically declined to 140.
However, the yen is still facing the same external headwinds. This is why it is unlikely to remain at the current low levels for a long time. The Fed may hike the benchmark rate more aggressively, while the Bank of Japan keeps rates at a negative level.
The question is whether the central bank is ready to adjust its monetary policy and shift to a dovish stance. Now, such a scenario looks extremely unlikely as it entails lots of risks given the previous six years of the ultra-loose policy.
So, the yen is depreciating due to the above-mentioned reasons. The results of the intervention, which were seen last week, have already been negated. The regulator seems to have already used all the available reserves to bolster the yen.
The yen is flirting today with the critical level of 145. It is trading choppy despite the consolidation of the US dollar. In the morning, it managed to recoup some of its losses. It is now moving in the price channel of 144.03-144.76.
The yen remains relatively strong amid its safe-haven status which restrains the growth of the pair. It was trading in the Asian session at 144.31. Nevertheless, judging by the fundamental factors, the pair is highly likely to climb higher.
The Australian dollar is also recovering on Tuesday, taking advantage of a slowdown in the rally of the US dollar. After falling on Monday to the lows of 2020, the Aussie grew to 0.6490.
An overall decline in commodity currencies as well as a downturn in China’s economy are weighing on the instrument. However, today, oil prices rise slightly from the lows of early 2022, bolstering the Australian dollar. The AUD/USD pair is moving in 0.6452-0.6515.
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