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Futures markets predict that U.S. interest rates will peak by
December this year compared with June 2023 at the start of July
and the Federal Reserve will cut interest rates by 50 bps next
year to support slowing growth. [0#FF:]
The upshot of this rapid drop in rate rise expectations has been
a big driver for the dollar's weakness against the yen with the
greenback slumping nearly 2.5% versus the Japanese unit this
week, its biggest weekly drop since late March.
Against the dollar, the yen climbed 0.8% on Friday to 133.17 yen
to its highest levels since mid-June.
The yen was the primary short of the widening interest rate
differential trade between the United States and its global
peers with short yen bets, despite a recent pull back, above
historical averages at $5.4 billion.
"The main trigger for the yen rebound has been the adjustment
lower in U.S. yields reflecting narrowing expectations for
policy divergence between the Fed and
BoJ," Mizuho strategists said in a daily note.
The gap between yields on 10-year U.S. Treasuries and equivalent
Japanese government debt has narrowed by 70 bps since the
beginning of June, as signs of slowing U.S. growth and interest
rate rises, pushed Treasury yields lower.
The U.S. dollar was broadly a bit softer elsewhere on Friday,
too, and the dollar index headed for a second straight weekly
loss. It fell 0.5% to 105.680, its lowest since July 5.
But risk appetite was capped with the euro struggling to stay
above the $1.02 levels on fears of a euro zone economy tipping
into recession by the end of the year.
Safe-haven currencies including the Swiss franc were in demand
on Friday.
(Reporting by Saikat Chatterjee; editing by Robert Birsel and
Toby Chopra)
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