U.S. Dollar Hits 34-Year High Against Yen After Bank of Japan Maintains Rates

The U.S. dollar surged to a 34-year high against the Japanese yen on Friday, reaching 157.795 yen, after the Bank of Japan (BOJ) maintained its ultra-low interest rates and U.S. inflation data met expectations. The BOJ's decision and the latest U.S. economic indicators suggest the Federal Reserve may delay cutting interest rates until later in 2024, further widening the policy divergence between the two central banks.

The yen plummeted to its lowest level since 1990 following the BOJ's announcement that it would keep its short-term interest rate target at a range of 0-0.1%, as widely anticipated. The central bank also removed a reference to the amount of government bonds it has roughly committed to buying each month, providing little support for the beleaguered currency. "If the authorities do not intervene at the 157 level, the U.S. dollar-Japanese yen pair could continue to rise, signaling the 'all-clear' for markets," analysts noted.

Meanwhile, the U.S. personal consumption expenditures (PCE) price index, the Fed's preferred inflation gauge, rose 0.3% in March, matching forecasts and indicating that inflation remains elevated. The core PCE inflation, excluding volatile food and energy items, also increased 0.3% monthly, keeping the annual increase at 2.8%. The stubborn inflation readings have led economists to believe the Fed will not start lowering rates until at least September, and potentially not until next year.

Why this matters: The widening interest rate gap between the U.S. and Japan has significant implications for global financial markets and trade. The yen's rapid depreciation is reshaping currency markets, enhancing the values of other currencies, and altering international trade dynamics. As the U.S. dollar continues to strengthen, it may impact the competitiveness of U.S. exports and the profitability of multinational corporations.

Japanese Finance Minister Shunichi Suzuki expressed concern about the negative effects of the weak yen and issued a fresh warning to speculators, hinting at potential market interventions to stabilize the exchange rate, similar to the yen buybacks in 2022. However, analysts suggest that any intervention by Japan without a hawkish policy message may be futile in stopping the yen's rout. As the U.S. dollar-Japanese yen pair nears all-time highs, speculation about the yen's floor intensifies, with investors closely watching for any signs of action from Japanese financial authorities.

Key Takeaways

• U.S. dollar surged to 34-year high against Japanese yen at 157.795 yen.
• BOJ maintained ultra-low interest rates, widening policy divergence with Fed.
• U.S. inflation data met expectations, suggesting Fed may delay rate cuts.
• Yen's rapid depreciation reshapes currency markets, impacts trade dynamics.
• Japan may intervene to stabilize exchange rate, but analysts doubt its efficacy.