FOREX-Dollar climbs to one-week high vs yen amid spike in Treasury yields

BY Reuters | TREASURY | 12/27/22 11:54 PM EST

By Kevin Buckland

TOKYO, Dec 28 (Reuters) - The dollar climbed to a more than one-week high versus the yen on Wednesday, buoyed by higher Treasury yields amid hopes for a strong rebound in Chinese growth as COVID-19 curbs loosen.

The yen also came under pressure amid more signals from the Bank of Japan that a surprise policy tweak last week was not the start of a scrapping of stimulus.

The dollar rallied 0.5% to 134.17 yen in Asian trading, and earlier touched 134.40 for the first time since Dec. 20, when the BOJ sent the pair spiralling lower with an unexpected loosening of the 10-year Japanese government bond yield policy band.

The greenback dropped as low as 130.58 yen that day for the first time since early August as traders speculated about an eventual withdrawal of stimulus.

A summary of opinions from the meeting though, released Wednesday, showed policymakers backing a continuation of ultra-accommodative policy, even as they discussed growing prospects the country could see higher wage growth and sustained inflation next year.

"It basically confirmed that the BOJ surprise from last week was a one-off, but from a longer-term viewpoint nobody believes it," said Osamu Takashima, head of G10 FX strategy at Citigroup Global Markets Japan, who expects dollar-yen to fall through 130 in the second half of next year.

"But in the near term, dollar-yen is bouncing back," he said. "Now, the market is expecting a solid recovery in the Chinese economy," and those hopes have stongly lifted bond yields, buoying dollar-yen, he added.

The 10-year Treasury yield, which tends to have a high correlation with the dollar-yen pair, was at 3.8506% in Tokyo, not far from the 1 1/2-month high of 3.862% reached overnight.

Japan's currency was also weaker on the crosses, with the euro gaining 0.51% to 142.70 yen, also a one-week high. The Australian dollar jumped 0.62% to 90.40 yen , another one-week peak.

The dollar index, which measures the greenback against six counterparts including the yen and euro, added 0.1% to 104.31, continuing its consolidation after sliding to the lowest level since mid-June at 103.44 on Dec. 14, the day the Federal Reserve slowed interest rate hikes to a half-point pace.

Fed officials including Chair Jerome Powell though have stressed since then that policy tightening will be prolonged, with a higher terminal rate, fueling worries of a U.S. slowdown.

"The dollar is in a very interesting situation," said Bart Wakabayashi, a branch manager at State Street in Tokyo.

"If we have a recession in the U.S., the Fed will have to cut rates, and obviously you will want to sell the dollar," he said. "At the same time, if there's a global recession, people will buy the dollar as a haven. So the dollar is in a bit of a conundrum, and you have to be really careful what currency you're buying or selling against."

The euro was flat at $1.0636, tracking sideways over the past two weeks, just below the six-month high of $1.0737 from Dec. 15, when European Central Bank President Christine Lagarde stressed rate hikes would need to continue.

Sterling eased 0.15% to $1.2013, as it continued to hover just above its low for the month of $1.1993, reached on Dec. 22.

The Australian dollar inched up 0.07% to $0.6738, drifting toward the top of its trading range since Dec. 16.

(Reporting by Kevin Buckland; Editing by Stephen Coates)

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