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Reuters: BOJ’s policy shift will decrease the demand for dollar

21 December 2022 215
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Source: Reuters

Author: Amanda Cooper

Article: Original Article

Publication date: Wednesday, December 21, 2022 

The biggest dollar growth in 40 years likely came to an abrupt halt when the last dovish central bank — Bank of Japan (BOJ) — finally loosened its iron grip on long-term interest rates.

On Tuesday, the BOJ shocked the markets with a sudden change in bond yield control and let the long-term interest rates continue to grow. It was directed to reduce several expenses related to long-term monetary stimulation.  

This decision caught the investors off guard and yen rose by almost 4% against the dollar, became the biggest daily growth for 24 years. The yield of 10-year Japanese Government Bonds (JGB) reached the highest level for seven years, and it practically doubled the cost of long-term loans.  

According to analysts, the decision of the BOJ will likely decrease the demand for US Treasuries. Japan, the biggest foreign holder of US national debt, has sold part of its assets over the past few months to protect the yen, which was losing more than 25% of its cost against the dollar.      

The dollar growth exhausted itself because other banks also increased their rates. The dollar moved to the biggest quarter decrease since the end of 2010 against the currency basket. 

Societe Generale's head of FX strategy Kit Juckes said that the biggest wave of dollar growth since February 1985 has practically ended. “Fed comes to an end of its rate-hiking cycle,” he said. “Rate hikes will be smaller and smaller, and, finally, they will stop.”

Nevertheless, some analysts think that Japan will likely continue to obtain US Treasuries, not least because of a significant number of Japanese investors owning US government debt securities.  

“From the Japanese investors’ point of view, if you’d look at dollar and yen, you’ll have enormous augmentation in US Treasuries before switching to yen,” said Rabobank senior rates strategist Richard Maguire. “That's why I don’t think that calculation will work. I don’t think that it will provoke the massive repatriation of Japanese investments back to the JGB that could hurt the German Bunds, Italian BTP and US Treasuries.”

Forecast: fall of the dollar index 

This content is for informational purposes only and is not intended to be investing advice.

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