The yen tumbled to its lowest against the dollar in 24 years on Monday, as the gap between Japanese and U.S. benchmark yields widened after red hot U.S. inflation data drove U.S. Treasury yields higher.
The dollar rose as high as 135.22 yen JPY=EBS , its highest since October 1998, having gained for each of the past seven sessions, as the policy divergence between hawkish central banks overseas and the dovish Bank of Japan (BOJ) becomes ever more apparent.
Central banks' efforts to raise interest rates to curtail inflation will remain in focus this week. The Federal Reserve and the Bank of England are expected to raise rates at their meetings and there is a chance the Swiss National Bank will do the same.
Little change is expected from the BOJ, however, which said on Monday it would buy 500 billion yen ($3.70 billion) of Japanese government bonds on Tuesday as part of its policy to keep benchmark 10-year yields within 0.25 percentage points of its 0% target.
In contrast, the benchmark U.S. 10-year yield US10YT=RR touched 3.2% early on Monday, having gained nearly 12 basis points on Friday.
The U.S. two-year yield US2YT=RR extended Friday's gains to touch 3.194%, its highest since late 2007.
U.S. inflation beat expectations on Friday driving bets that the Fed will have to raise rates even more aggressively. Market pricing indicates roughly a two-thirds chance of at least 125 basis points of increases across the Fed's next two meetings - on Tuesday and Wednesday this week and in July - according to the CME's FedWatch tool.
That implies at least one increase of 75 basis points, which would be the biggest single-meeting raise since 1994.
Higher energy prices have also hurt Japan's balance of payments, weighing on the yen.
"For the yen, what could go wrong did go wrong, and continues to go wrong,” said Paul Mackel global head of FX research at HSBC, adding it was important to watch whether Japanese investors were prepared to take more unhedged currency risk in their portfolios.
"The big thing now is whether the domestics begin to change their so-called FX hedge ratio, which could lead to more persistent demand for foreign exchange versus Japanese yen. If so, that keeps the currency on a weakening path, or at least stops it strengthening.”
Monday's declines follow a short-lived yen rally late on Friday when Japan's government and central bank said they were concerned by its recent sharp falls, a rare joint statement seen as the strongest warning to date that authorities could intervene to support the currency.
Expectations of a more hawkish Fed are pushing up the dollar against more than just the yen. The dollar index =USD , which tracks the greenback against six peers, was 0.3% higher at 104.58, its highest in four weeks.
The euro EUR= was languishing at $1.0490, down 0.23%, and sterling GBP=D3 was 0.23% lower at $1.2287, taking little support from expectations the Bank of England will raise rates on Thursday, which would be its fifth increase since December.
The Swiss National Bank also meets Thursday, and a 25 basis point increase is on the cards.
The risk-friendly Australian dollar AUD=D3 lost as much as 0.6% falling to $0.6998, a three-and-a-half week low, as fears about the impact of higher rates drove investors to perceived safer assets.
Similarly bitcoin BTC=BTSP , also a so-called risk asset, was under pressure and dropped to a new 18-month low of $24,888, as cryptocurrency lending firm Celsius Network said it would pause withdrawals and transfers between accounts due to "extreme market conditions".
($1 = 135.0200 yen)
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