Possibility of 50 basis point Fed hike pushes yen and euro down

[March 22, 2022]  By Joice Alves and Tom Westbrook

LONDON (Reuters) - The dollar rose on Tuesday as Federal Reserve Chair Jerome Powell put the possibility of 50 basis point rate hikes on the table, while the yen fell below the psychological 120 level as the Bank of Japan reiterated its support for ultra-loose monetary policy.

The euro was also under pressure, sliding to an almost one-week low versus the dollar.

The yen hit a six-year low of 120.50, down 0.8% on the day, having lost more than 4% against the dollar this month, as leaping U.S. yields and a deteriorating trade balance suck cash from the world's third-biggest economy.

Yen crosses also suffered, with the euro making a five-week high of 132.41. The Japanese currency slumped to an almost seven year low against the Swiss franc.

Japan must maintain ultra-loose monetary policy lest inflation hurt the economy, Bank of Japan Governor Haruhiko Kuroda said on Tuesday - contrasting with hawkish overnight comments from Fed's Powell.

Powell sent U.S. yields to multi-year highs by putting the possibility of 50 basis point (bp) rate hikes on the table.

"Rising energy prices and higher U.S Treasury yields are both bad news for the Japanese yen," said analysts at Singapore's UOB in a quarterly outlook note that lifted their year-end dollar/yen forecast from 119 to 121.

Two-year, five-year, 10-year and 30-year Treasury yields all stood at their highest since 2019 on Tuesday, widening the gap on Japanese yields while lending the dollar broad support elsewhere. [US/]

The euro, hit by the Ukraine war and rising oil prices, fell below $1.10 in early London trading, but had recovered a tad to trade down 0.1% at $1.1005 by 0900 GMT.

European Union foreign ministers are split on whether to join the United States in sanctioning Russian oil, with some countries including Germany arguing the bloc is too dependent on Russia's fossil fuels.

European Central Bank President Christine Lagarde and Chief Economist Philip Lane are expected to give speeches later in the day.

Danske Bank analysts said they see the euro diving to $1.05 in 12 months as Fed and ECB monetary policies diverge.

The U.S. dollar index rose 0.15% to 98.651.

Cryptocurrencies were bid on Tuesday, with bitcoin jumping to a three-week high. It was last up 3.3% to $42,528.

(Reporting by Joice Alves and Tom Westbrook; Editing by Sam Holmes and Mark Potter)

[© 2022 Thomson Reuters. All rights reserved.]
This material may not be published, broadcast, rewritten or redistributed.  Thompson Reuters is solely responsible for this content.