Dollar Edges Lower; Yen Tries to Recover From Hefty Selling

The U.S. dollar edged lower Tuesday while the Japanese yen recovered a little from heavy selling as the Bank of Japan continued its dovish monetary policy stance.

At 2:55 AM ET (0655 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 98.933.

USD/JPY dropped 0.3% to 123.50, retreating slightly after rising to its strongest level since December 2015 on Monday, climbing over 7% in the last month with the Bank of Japan buying bonds this week to defend its yield target.

Japan’s central bank bought a little more than $500 million in bonds on Monday and another $2 billion earlier Tuesday, having vowed to make unlimited purchases in the market until Thursday to defend its 10-year yield target of 0.25%.

This contrasts sharply with most central banks across the rest of the world, including importantly the U.S. Federal Reserve, which are hiking rates, pushing their respective yields higher.

“We think a move by 125 in USD/JPY is a matter of ‘when’ rather than ‘if’ given the bond market weakness on the back of rising Fed tightening expectations and rising energy prices, which are a negative for the export-dependent Japanese economy,” said analysts at ING, in a note. “Upside risks should continue to prevail even beyond 125 and 130 is well within reach in the near term unless the bond environment improves.”

Elsewhere, EUR/USD rose 0.2% to 1.1000, benefiting slightly from the hope that peace talks due to start later Tuesday in Turkey could bring an end to the Ukraine/Russia war, which is now in its second month.

That said, the single currency remains weak with the latest data from the GfK institute showing German consumer morale looks set to slump heading into April as the war in Ukraine weighs on households’ income expectations.

The institute said its consumer sentiment index fell to -15.5 points heading into April from a revised -8.5 points a month earlier, the lowest since February 2021.

“We still see mostly downside risks for EUR/USD in the short-term, with a move to 1.0800 looking likely by the end of the year,” added ING.

GBP/USD rose 0.1% to 1.3102, ahead of the release of the latest Bank of England Quarterly Bulletin, and AUD/USD rose 0.3% to 0.7509 after Australian retail sales beat forecasts again in February, climbing 1.8% from the previous month, beating forecasts of a 1.0% rise.