The dollar touched a 9-1/2-month high against the yen on Thursday, as oil prices surged after OPEC agreed for output cuts - lifting inflation expectations and US bond yields.
Steven Mnuchin, President-elect Donald Trump’s pick to lead the US Treasury, gave no hint of any unease over the strong dollar in his first remarks since being named for the job, giving traders fresh impetus to buy the US currency.
The dollar’s index against a basket of six major currencies last stood at 101.42. On Wednesday, it had risen as high as 101.83, nearing a 13-1/2-year peak of 102.05 set last week.
The dollar’s rebound came as oil prices jumped around 9 per cent on Wednesday as OPEC members agreed to cut production, its first reduction since 2008.
The gains in oil prices stoked inflation expectations, which in turn sent US Treasury yields higher given the negative impact of inflation on bond prices.
The higher Treasury yields fuelled demand for the dollar relative to currencies such as the euro and yen, whose government bond yields are still low-to-negative.
The dollar rose notably against the yen, hitting a peak of114.83 yen earlier on Thursday, its strongest level since mid-February. The dollar was last trading at 114.17 yen, down 0.2 per cent on the day.
“I think it is just a matter of time that the dollar will test 115 yen after Mnuchin was silent about the dollar’s strength,” said Masafumi Yamamoto, chief currency strategist atMizuho Securities.
Mnuchin had said on Wednesday the administration would make tax reform and trade pact overhauls top priorities as he outlined Trump’s economic agenda along with Wilbur Ross, Trump’s nominee for commerce secretary.
“The good news is that they seem to be saying that no one will be tariffed up and no one will be named a currency manipulator on day 1,” Steven Englander, Global Head of G10 FXStrategy at CitiFX in New York, wrote in a note.
In contrast, the yen was weighed down by the Bank of Japan’s policy of controlling long-term bond yields.
The euro rose to 121.55 yen, its highest level since June 24, even though the currency was capped on the whole ahead of Italy’s referendum on Sunday, which could reject PrimeMinister Matteo Renzi’s constitutional reforms, on which he has staked his political future.
His departure could destabilise Italy’s fragile banking system and be taken as another sign of rising anti-establishment sentiment in Europe, potentially eroding investor confidence in the currency union.
Still, some analysts say that the market reaction may prove relatively limited even if Italy’s referendum rejects the reforms, at least compared to the swings seen after the Brexit vote and the US presidential election.
“If there is a ‘no’ vote, I would expect some negative reaction in the market. I would expect some negative reaction from the euro, but our view is that it will be much more contained,” said Jim McDonald, chief investment strategist for US-based asset manager Northern Trust.
“The good news is that this may be a negative outcome that the market is actually ready for, as opposed to being surprised by both Brexit and Trump's victory,” McDonald added.
The euro edged up 0.1 per cent to $1.0602, but was down from Wednesday’s intraday high of $1.0666.