Dollar index hits 5-month high as rhetoric supports yen

Dollar index climbs to 5-month highs on robust U.S. data

On Tuesday, the U.S. dollar reached its highest point in nearly five months, fueled by robust economic data that led investors to temper their expectations of a June interest rate cut.

Concerns about potential intervention by the Japanese government slowed the dollar's gains against the yen, despite a surge in long-term U.S. Treasury yields — typically correlated with the currency pair — to a two-week high overnight. USD to JPY was mostly flat at 151.67 at the time of writing.

The dollar index (DXY) — a gauge of the greenback’s strength against six major peers — climbed to 105.1 on Tuesday, its highest level since November 14, adding to earlier gains on Monday after new U.S. data showed the first expansion in manufacturing since September 2022.

As of 09:45 GMT on Tuesday, DXY had scaled back to 104.99 (-0.03%).

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Euro, cable touch lows as ISM manufacturing data shows expansion

The euro slid to its lowest level since mid-February, hovering near its November lows, with the EUR to USD pair trading slightly lower at $1.0742. Data released on Tuesday indicated a continued deepening of the eurozone factory downturn in March.

Sterling remained relatively stagnant early in the session, with GBP/USD at the lower end of its recent range and close to its December lows at $1.2558.

The GBP to USD pair then gained 0.14% to trade at $1.2569 as of 10:00 GMT.

The previous day's U.S. ISM manufacturing survey data revealed a notable increase in sector prices, adding to investor concerns about inflation returning to the Federal Reserve’s 2% target and potentially postponing the first interest rate cut.

Fed Chair Jerome Powell said on Friday that the central bank was in no rush to lower borrowing costs following a slight uptick in the Personal Consumption Expenditures (PCE) price index — the Fed’s preferred measure of inflation — in February. The PCE index was up 2.5% for the 12 months that ended in February, compared with January’s 2.4%.

Driving the increase was a 2.3% jump in energy prices last month. Powell appeared unfazed by the data, saying that it fell “pretty much in line with [the Fed’s] expectations”.

Chris Turner, Head of Global Markets at ING, issued a comment to Reuters on the dollar’s reaction to the data:

"This (dollar) strength is an extension of the move seen late last week when the Federal Reserve's Christopher Waller delivered a less dovish speech. Any reversal in this dollar strength - if it does come - will have to be data-driven".

Turner added that U.S. job openings data could weigh on the U.S. currency and the dollar index later in the day if it showed a fall in vacancies.

Japanese yen largely flat as government “jawboning” supports JPY

The Japanese yen was slightly down against the dollar, with USD/JPY at 151.69 (down 0.03%) after dipping to 151.79 earlier in the session.

The USD to JPY pair has traded in a tight range since hitting a 34-year low last Wednesday, which spurred Japanese government officials to step up rhetoric of intervention.

Finance Minister Shunichi Suzuki stressed on Tuesday that he would not rule out any options to respond to disorderly currency dynamics. The Japanese authorities last intervened to support the currency in 2022, when the yen slid towards a 32-year-low of 152 toward the dollar.

The Japanese yen’s decline has come despite the Bank of Japan delivering its first interest rate hike since 2007 last month, with officials cautious about further monetary tightening amid a fragile exit from decades of deflation.

Nicholas Chia, Asia macro strategist at Standard Chartered, told Reuters that officials were “wary of backing themselves into a corner by drawing a line in the sand at 152.”

"The rationale of jawboning and intervening in FX markets is mainly to buy time for the JPY in the hopes that USD strength wanes and recedes."

A senior Standard Chartered analyst said last Friday that Japanese yen intervention was “very, very close”.

Elsewhere, the Chinese yuan depreciated to a 4-and-a-half-month low as a strengthening dollar offset selling of the U.S. currency by state-owned banks. USD/CNY dipped to 7.2357 yuan per dollar — the pair’s weakest level since November 2023.

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