Dollar hits one-week high vs yen, drops against pound as UK markets reopen

By Hannah Lang and Amanda Cooper

WASHINGTON/LONDON (Reuters) – The dollar touched a one-week high against the yen on Wednesday, boosted by a jump in Treasury yields and investor expectations for a rebound in Chinese growth as COVID-19 curbs loosen.

Meanwhile, the pound headed towards its largest one-day rise against the dollar in two weeks as Britain’s markets reopened after a long weekend.

Gilts, which have not traded since Friday, came under pressure in line with a sell-off in global government bonds the previous day, which pushed yields up and further supported the pound.

The dollar rallied by as much as 0.67% against the yen to 134.40 in Asian trading, the most since Dec. 20, when the Bank of Japan sent the pair spiralling lower with an unexpected loosening of the 10-year Japanese government bond yield policy band.

That day, the yen staged its biggest one-day rally against the dollar in 24 years, closing 3.8% higher, as traders speculated about an eventual unwinding of stimulus.

But a summary of opinions from the meeting, released on Wednesday, showed policymakers backing a continuation of ultra-accommodative policy, even as they discussed improving prospects for 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.

The dollar was last up 0.21% against the Japanese yen at 133.785.

If yields on Japanese government bonds remain steady, there will likely be no further pressure on the BOJ “to take another step,” said Greg Anderson, global head of foreign exchange strategy at BMO Capital Markets in New York.

“They can just continue to reiterate what they said at the press conference: this is just a minor technical adjustment. We’ve done it before; nothing to see here, folks,” he said.

Sterling rose by as much as 0.63% against the dollar to 1.211, heading for its largest-one day rise in two weeks.

Throwing a wrench in the works for markets in the final week of the year is China’s rapid dismantling of the strict zero-COVID policies that have severely hampered its economy for nearly three years.

Investors are having to reconcile the pick-up in economic activity as China’s consumers and businesses return to some kind of normality while also dealing with the impact of a surge in infections.

“With infection levels running at many thousands per day, it’s little wonder that China’s COVID response should top many analysts’ list of concerns about 2023,” said DailyFX analyst David Cottle.

The dollar index, which measures the U.S. currency against six major rivals, eased 0.211% to 103.980. It hit a six-month low of 103.44 two weeks ago, when the Federal Reserve slowed the pace of its interest rate increases.

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

The euro firmed by 0.16% to $1.06580, having traded steadily around six-month highs in the couple of weeks since European Central Bank President Christine Lagarde said that rate hikes would need to continue.

The Australian dollar rose 1.00% against its U.S. namesake to $0.680, while the New Zealand dollar strengthened by 1.07% to $0.634.

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(Reporting by Hannah Lang in Washington and Amanda Cooper in London; Additional reporting by Kevin Buckland; Editing by David Goodman and Tomasz Janowski)