The dollar fell from a five-month high versus the yen on concern the currency’s recent surge was too rapid and on speculation the U.S. government will view its strength as a threat to economic growth.
A gauge of the greenback declined for the first time since Donald Trump won the Nov. 8 U.S. election. Speculation he will spur inflation by boosting spending set off a surge in Treasury yields, increasing their premium over Japanese bonds to the widest in almost three years. The dollar has strengthened against all but one of 16 major counterparts over the past week as the odds of a Federal Reserve rate increase next month climbed above 90 percent. Its rally pushed the dollar into overbought territory against the yen for the first time this year.
“The dollar’s surge from around 101 to 108, just in a few business days, is like going over the speed limit, so a bit of a correction is natural,” said Takuya Kanda, a senior researcher at Gaitame.com Research Institute Ltd. “The dollar is currently rallying on expectations only. But the policies Trump has called for are all dollar-positive. After pausing around 107 to 108, the dollar will resume its uptrend toward 110 yen by year-end.”
The dollar fell 0.2 percent to 108.17 yen as of 1:41 p.m. in Tokyo from Monday, when it climbed to 108.54, the strongest since June 3. The U.S. currency fell to a one-month low of 101.20 yen on Nov. 9.
The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, declined 0.1 percent, halting a four-day gain of 3.2 percent. It surged 2.8 percent last week, the most since September 2011.
“U.S. authorities may not like to see the dollar rise this far as it’s at a level that could weigh on the economy,” said Hiroshi Kurihara, chief U.S. economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “There should be caution about expectations for fiscal policies that will raise growth or inflation sharply, and there is scope for markets to face a bit of a correction.”
Speculation that inflation will accelerate pushed up 10-year U.S. Treasury yields to 2.3 percent on Monday, the highest since Dec. 31, as odds strengthened for a Fed rate increase next month. The 10-year Treasury yield fell 2.3 percent to 2.21 percent on Tuesday.
The probability of a December move rose to 92 percent from 84 percent on the Nov. 8. Richmond Fed President Jeffrey Lacker said that a more stimulative fiscal outlook usually warrants higher policy rates. Speaking with journalists before a speech in Chestertown, Maryland, Lacker also said the election seems to have shifted expectations on fiscal policy, although there is still much to learn.
“After the sharp depreciation of the yen, market participants seem to be unwinding their positions to take profit,” said Hirofumi Suzuki, an economist at the treasury department of Sumitomo Mitsui Banking Corp. in Singapore. “Ten-year U.S. government bond yields look to have calmed.”
--With assistance from Mika Otsuka To contact the reporters on this story: Chikako Mogi in Tokyo at cmogi@bloomberg.net, Lilian Karunungan in Singapore at lkarunungan@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Jonathan Annells, Amit Prakash
©2016 Bloomberg L.P.
