By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) -The dollar rose to a new 34-year high against the yen on Friday, partly supported by U.S. inflation data that showed no signs of easing, in line with forecasts and confirming expectations that the Federal Reserve Reserve likely Postpone the interest rate cut until later this year.
The dollar’s spike against the yen came after the Bank of Japan kept rates steady at the end of its two-day policy meeting, although it signaled future rate hikes. With the yen at multi-decade lows, market participants were on alert for possible interventions from Japan to support the currency.
The dollar reached 157.795 yen, its highest level since June 1990, and was last up 1.3% at 157.71. The dollar briefly fell to 154.97 earlier in the session, prompting speculation that the BOJ, which acts on behalf of the Treasury Department, may have controlled exchange rates, signaling the central bank is preparing to tighten to grasp.
It was not immediately clear what caused the movement.
The dollar was on track for a weekly gain of 2% against the Japanese currency, the biggest since mid-January.
In the United States the emphasis was on inflation.
The personal consumption expenditures (PCE) price index rose 0.3% in March, compared with a forecast of a 0.3% increase, the data showed. In the 12 months to March, PCE inflation rose 2.7%, versus expectations of 2.6%.
The PCE price index is one of the inflation measures the Fed tracks for its 2% target. Monthly inflation rates of 0.2% over time are needed to bring inflation back to target.
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“While Friday’s result wasn’t as positive as the whispered figure, the stark reality is that short-term trends on the Fed’s favorite inflation gauge have been moving steadily north since the start of 2024,” wrote Douglas Porter, chief economist at BMO.
Porter added that the 0.32% monthly increase brought a small sigh of relief to the market, but noted that this figure would have matched the fastest monthly increase in the decade leading up to the pandemic.
“That will hardly give the Fed ‘confidence’ that inflation is calming,” Porter wrote.
Following the inflation data, U.S. interest rate futures have priced in a 58% chance of a Fed cut at the September meeting, up from 68% a week ago, according to the CME’s FedWatch tool. Fed easing is priced at more than 80% in December.
In afternoon trading the price rose 0.3% to 105.93.
The euro fell 0.2% to $1.0705. This week, yields rose 0.4%, marking the biggest weekly increase since early March.
Against the yen, the euro reached a new 16-year high of 168.85 yen. It last traded at 168,845, up 1.1%.
On a weekly basis, the European single currency rose 2.5% against the yen, poised for its best performance since mid-June 2023.
Sterling fell 0.1% to $1.2501. The rate rose 1.1% against the dollar this week, the biggest gain since early March.
In Japan, the BOJ left its short-term interest rate target at 0-0.1% on Friday and made small upward adjustments to its inflation forecast. Investors had not expected a policy change, but saw the decision as confirmation that only small steps were ahead.
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BOJ Governor Kazuo Ueda told a news conference after the interest rate decision that monetary policy did not directly target currency rates, but exchange rate volatility could have a significant impact on the economy and prices.
“If movements in the yen have an effect on the economy and prices that is difficult to ignore, that could be a reason to adjust policy,” Ueda said.
Currency investors are now focusing on next week’s Federal Open Market Committee (FOMC), in which the US central bank is expected to keep interest rates steady.
The market is positioned for an aggressive Fed and a stronger dollar at the meeting, given the string of better-than-expected economic data.
Brian Dangerfield, head of G10 FX strategy, US at NatWest, wrote in a research note that the bank believes Fed Chairman Jerome Powell will not rule out rate hikes, a prerequisite for data-driven policy. However, a rate hike is not the FOMC’s base case, Dangerfield said.
