The dollar’s decline began on Tuesday, when data showed that business activity in the euro zone expanded at its fastest pace in nearly a year, primarily due to a recovery in services. The euro responded with a solid 0.45% rally, reaching $1.069975. Sterling also benefited from upbeat overnight data, as British businesses recorded their fastest growth in activity in nearly a year. Bank of England Chief Economist Huw Pill further buoyed sentiment by suggesting that interest rate cuts remained some way off. As a result, sterling rose 0.79% to $1.24485.
In contrast, the dollar’s struggles intensified after the release of US data showing that business activity cooled in April to a four-month low due to weaker demand. This data, coupled with slightly easing inflation rates, raised hopes for some possible relief from the Federal Reserve. The market is now pricing in a 73% chance of a first rate cut by September, according to the CME’s FedWatch tool.
Despite the dollar’s broader weakness on Tuesday, it briefly touched a fresh 34-year high against the yen at 154.88. However, the pair has since oscillated in a narrow range, with traders cautious about the risk of dollar-selling intervention by Japanese officials if the rate rises above 155. Japanese Finance Minister Shunichi Suzuki has issued strong warnings about the possibility of intervention, suggesting that last week’s meeting with US and South Korean counterparts has set the stage for Tokyo to act against excessive yen moves.
The Bank of Japan is expected to maintain its policy settings and bond purchase amounts unchanged at the conclusion of a two-day meeting on Friday, having raised interest rates for the first time since 2007 just last month. While the central bank may signal a readiness to tighten policy again this year, its ultra-cautious, data-dependent approach is expected to limit any significant strengthening in the yen.
Analysts warn that FX intervention could harm the credibility of Japanese authorities if it fails. Historically, FX intervention has been most successful when the fundamentals are turning in favor of the currency in question. In this case, the dollar-yen pair may not turn lower until the summer, assuming the Fed does cut rates in September.
