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Morning Bid: Dollar flexes again, Japan warns

[March 27, 2024] A look at the day ahead in U.S. and global markets from Mike Dolan

The U.S. dollar is flexing muscle yet again as the first quarter grinds to a close, surging anew on Wednesday against Japan's yen, the Swiss franc and China's yuan - and drawing stern warnings from Japanese government officials in the process.

The dollar/yen exchange rate hit a 34-year high just a whisker from 152 overnight -- surpassing previous peaks from 2022 that drew intervention from the Bank of the Japan at the time. The dollar has now jumped almost 20% against the yen since the beginning of last year.

Clearly monitoring the yen's slide in real time, Japan's finance minister Shunichi Suzuki issued his strongest warning to date in the current episode and said the authorities could take "decisive steps" - a phrase previously used in Autumn 2022 just before Japan stepped in to sell dollars on the open market.

What irks Japanese officials most is the fact the yen's fall has accelerated even after the Bank of Japan has started to normalise its super-loose monetary policy - prompting speculation the central bank may have to move faster on that score regardless of any currency market steps.

And of course Japanese stocks lapped up the weaker currency as an additional export fillip, with the Nikkei benchmark jumping almost 1% on Wednesday.

The weakening yen tends to pressure other competing Asia currencies, not least China's yuan - which also fell again earlier.

Unlike the Nikkei, Chinese stocks got no solace from the currency move, however, and recoiled to near one-month lows.

Even though data showed Chinese industrial profits picked up at the start of the year, political tensions and property sector worries have seen foreign investors continue to exit the market - with almost a $1 billion sold again on Wednesday via the Stock Connect system, the biggest outflow since mid-January.

China's President Xi Jinping met with American business leaders at the Great Hall of the People in Beijing as the government tries to woo foreign investors back to the country and international firms seek reassurance over new regulations.

But the dollar is pumped up more generally - lifted by slightly more hawkish Federal Reserve noises on the trajectory for policy rates through next year and beyond.

Above-forecast U.S. durable goods orders data on Tuesday bolstered the view of a robust economy, while business spending on equipment showed tentative signs of recovery and consumer confidence held steady.

With the Swiss National Bank having jumped the gun on its major central banking peers last week by cutting interest rates, the Swiss franc leads the way lower against the dollar in Europe and hit its weakest point since November 3 last year.

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U.S. Dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File Photo

A growing feeling that other European central banks may move to ease ahead of the Fed has put every central bank meeting under the microscope.

Sweden's crown touched its weakest levels of the year against both the dollar and euro on Wednesday after the Riksbank, Sweden's central bank, held its key rate steady at 4% but said inflationary pressures had eased enough for it to make the first of several policy rate cuts in the coming months.

The European Central Bank, meantime, is increasingly confident that inflation will fall back to its 2% target by mid-2025 as wage growth moderates, strengthening the case for lower interest rates, ECB board member Piero Cipollone said.

European stocks were marginally higher on the day, although oil and gas shares there were the biggest drag on the index as crude oil prices ebbed on rising U.S. crude inventories and signs Russia is struggling to get payment for oil shipments amid sanctions threats on related banking flows.

Back on Wall St, the downbeat start to the week for stocks continued on Tuesday - but futures were positive again ahead of Wednesday's bell. Treasury yields were flat.

In politics, much of the focus on Tuesday was on how shares of Donald Trump's Trump Media & Technology Group surged as much as 59% in their Nasdaq debut, lifted by the former U.S. president's supporters and providing him a potential windfall as he grapples with the costs of several legal cases.

But the latest opinion poll trackers show President Joe Biden's approval ratings among American voters picking up in March to their best levels of the year so far.

Key diary items that may provide direction to U.S. markets later on Wednesday:

* Federal Reserve Board Governor Christopher Waller speaks, Swiss National Bank Vice Chairman Martin Schlegel speaks

* South Africa Reserve Bank policy decision

* US corporate earnings: Cintas, Carnival, Paychex

* US Treasury sells 7-year notes, 2-year floating rate notes

* Dutch Prime Minister Mark Rutte meets Chinese President Xi Jinping in Beijing; Brazil President Luiz Inacio Lula da Silva meets French President Emmanuel Macron in Rio de Janeiro

(By Mike Dolan, editing by Christina Fincher, mike.dolan@thomsonreuters.com)

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