USD/JPY edges closer to 150 amid U.S. Treasury Yield surge

The Japanese yen flirted with the 150-per-dollar threshold on Monday, succumbing to pressure from elevated U.S. Treasury yields. The dollar held firm globally, buoyed by investors awaiting pivotal events this week, including the European Central Bank meeting and the release of U.S. GDP data along with the Federal Reserve’s preferred inflation gauge.

U.S. Treasuries remained at the forefront of investor concern, with 10-year yields hovering around 4.982%. The greenback, though not rising in tandem with yields, maintained its strength, propelled by the steady uptick in long-term U.S. Treasuries yields. This surge was fueled by widening term premiums, driven by expectations of robust economic growth and fiscal adjustments.

The yen briefly touched 150.14 per dollar, a level last witnessed on October 3, sparking suspicions of Bank of Japan (BOJ) intervention. However, Masafumi Yamamoto, Chief Currency Strategist at Mizuho Securities in Tokyo, suggested that a battle between two investor factions might be at play. Some were banking on the BOJ defending the 150 level, while others responded to escalating U.S. yields by pushing the dollar higher.

Yamamoto noted that the BOJ had signalled its intent not to allow domestic yields to spike significantly. Speculation loomed about a potential adjustment to the BOJ’s bond yield control stance next week, including the possibility of a hike to an existing yield cap set just three months ago. The benchmark JGB yield, at 0.86%, hit its highest level since July 2013, intensifying the pressure on the BOJ to reconsider its policies.

The upcoming European Central Bank meeting adds another layer of complexity for investors. A recent poll indicated that while the ECB concluded its rate hikes, any further easing might not occur until at least July 2024, following a 25 basis points increase in key interest rates in September.