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Dovish Bank of Japan is Helping the Dollar Extend Gains

In: Finance, Forex

The ascendant dollar got a fresh boost from a dovish Bank of Japan statement on Thursday, which pushed the yen toward a key psychological level and weighed on currencies from Asia to Europe.

A gauge of the greenback climbed as much as 0.5% to trade at the highest since May 2020, while the dollar-yen climbed as much as 1.1% to just under the closely-watched 130 level. The Bank of Japan doubled down on its bond buying operations to keep a lid on rising yields.

In Asia, the Korean won and Chinese yuan came under pressure, while in Europe the moves sent the euro and pound lower at lunch-time trading in Tokyo.

The yen has been in freefall this year as the dovish Bank of Japan keeps local yields anchored to the floor while their Treasury equivalents surge on expectations for aggressive Federal Reserve rate hikes. The currency has also suffered from Japan’s position as a commodity importer at a time of surging prices.

The BOJ said it would carry out fixed-rate bond buying every business day as part of its stimulus measures. As expected, it kept its yield curve control settings and the scale of its asset purchases unchanged, according to a statement on Thursday.

The gap between 10-year Japanese and U.S. bond yields has widened to the most in three years as the Fed embarks on a series of hikes in a bid to contain rising inflation. While Japan’s consumer prices are also rising due to higher import costs, the central bank has said it won’t change policy until inflation is stable above its 2% target.

A widening trade deficit has also meant more yen flowing out of the country to pay for dollar-priced goods. The divergence in yields and trade has outweighed efforts from government officials to pare back the currency’s slide.

Japan’s government bonds rallied following the BOJ decision, with the 10-year yield falling 2.5 basis points to 0.215%. The 30-year yield dropped by the same degree to 0.95%.

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