Dollar holds firm after volatile week, yen in spotlight

LONDON, April 22 (Reuters) – The dollar held steady
against the euro and the yen on Monday after the most volatile
week of trading for the currency market in months, as investors
assessed policy and geopolitical developments.

The market is laser-focused on the yen ahead of
the Bank of Japan’s (BOJ) policy review on Friday.

The yen traded around 154.69 per dollar, a whisker away from
last week’s 34-year low of 154.79 and close enough to the
155-level that is next on traders’ radars for possible
intervention by Japanese authorities.

“There will be a focus on the BOJ meeting, but it is too
soon for them to alter policy, and the market gives a change in
rates no chance at all,” said Chris Weston, head of research at
Pepperstone.

The dollar’s trade-weighted index was above 106, but
off the five-month highs hit last week after comments from
Federal Reserve officials and a run of hotter-than-expected
inflation data forced a paring back of rate cut expectations.

A cooling in Middle East tensions, which had driven the
dollar, gold and crude oil prices sharply higher
on Friday and battered stock markets, also helped temper
volatility. Tehran downplayed Israel’s retaliatory drone strike
against Iran, in what appeared to be a move aimed at averting
regional escalation.

Last week saw a big pickup in volatility. Deutsche Bank’s
index of currency volatility rose 9.7% to its highest
since February.

This was the biggest weekly rise in the index since
September 2022, when the pound crashed to record lows against
the dollar after the UK government’s spending plans threw
British markets into crisis, and as the BOJ intervened to buy
the yen for the first time since 1998.

Besides the BOJ meeting and one of the biggest weeks for
U.S. earnings releases, investors will also get U.S.
first-quarter gross domestic product data on Thursday and the
inflation metric the Fed targets, the personal consumption price
expenditures (PCE) index.

“FX has been centre-stage for the last few weeks and might
take a backseat this week as earnings take centre-stage,” XTB
research director Kathleen Brooks said.

“The FX market can only think at one thing at a time and
right now, it’s obsessed with the strong dollar. So if we see
any sign of any kind of weakening in the U.S. economy, that’s
what we’re waiting for. But I don’t think we’re going to see it
in the GDP report,” she said.

The strong dollar prevailed at last week’s International
Monetary Fund/World Bank spring meetings in Washington too, and
the United States, Japan and South Korea issued a rare joint
statement on the issue.

Speaking after the Group of 20 (G20) finance leaders’
meeting in Washington, BOJ Governor Kazuo Ueda said the Japanese
central bank may raise interest rates again if the yen’s
declines significantly push up inflation, highlighting the
dilemma the weak currency has become for policymakers.

The dollar has scorched higher against a range of currencies
and yet the yen has been the worst performing major
this year, with losses mounting to 9%.

The rethink on Fed easing has led to a general repricing of
global rate cut timelines, but expectations for the European
Central Bank (ECB) and the Bank of England (BoE) to start
cutting by mid-year are still intact.

Analysts do not see too much room for U.S. Treasury yields
to rise further, given the light economic data calendar for the
rest of the month and how far they have already risen as
investors reprice Fed expectations.

Two-year note yields have climbed 38 basis points
this month to five-month highs above 5.0%.

China’s yuan slid to 7.2518 per dollar, its
weakest since mid-November, despite the central bank’s daily
benchmark guiding it higher and support from state-owned banks.

Bitcoin was last up 2.2% at $66,071. The world’s
largest cryptocurrency completed its “halving” at the weekend, a
phenomenon that happens roughly every four years and aims to
reduce the rate at which bitcoins are created.

(Additional reporting by Vidya Ranganathan in Singapore;
Editing by Jamie Freed and Mark Potter)