The dollar remained relatively stable on Monday following a soft U.S. jobs report, which increased expectations that the Federal Reserve might cut rates twice this year. Meanwhile, the yen started the week slightly weaker.
Last week, the yen recorded its strongest weekly gain in over 17 months, driven by two suspected Japanese government interventions to prevent the currency from dropping below its 34-year low of 160.245 per dollar.
On Monday, the yen declined by 0.43% to 153.62 per dollar in early trading, after reaching a three-week high of 151.86 on Friday. This drop was further fueled by the dollar’s decline following the release of the jobs data.
Mainland China’s markets were closed for three days last week, but the offshore yuan strengthened as the dollar retreated. This was supported by data indicating a cooling U.S. jobs market, confirmation from Fed Chair Jerome Powell of the central bank’s easing bias, and Japan’s intervention to bolster the yen.
The offshore yuan was last quoted at 7.1959 per dollar, marking a gain of over 1% for the week.
With Japan and Britain observing holidays on Monday, trading volumes are expected to be lower. However, given Japan’s recent interventions during quiet periods, traders remain vigilant throughout the day.
Despite the Bank of Japan’s estimated expenditure of over 9 trillion yen to support the weakening yen last week, analysts suggest that this move has only temporarily alleviated pressure on the currency. The market continues to perceive the yen as a sell.
The Commodity Futures Trading Commission’s weekly commitments of traders report revealed that non-commercial traders, including speculative trades and hedge funds, reduced their short positions on the yen to 168,388 futures contracts in the week ending April 30. However, this figure remains close to their largest bearish positions since 2007.
Goldman Sachs strategists believe that while Japan has the capacity for further intervention, the overall macro environment remains unfavorable for the yen. They noted that intervention can only be successful to a certain extent. Nonetheless, buying time is deemed valuable as it reduces the potential for economic disruptions caused by exchange rate adjustments and could stabilize the currency until there is a more supportive economic backdrop for the yen.
On Friday, Fed data revealed that U.S. job growth slowed more than anticipated in April, and the annual wage increase dropped below 4.0% for the first time in nearly three years. These signs of a cooling labor market have boosted optimism that the U.S. central bank could orchestrate a “soft landing” for the economy.
Markets are currently pricing in 45 basis points of cuts this year, with a rate cut in November fully factored in.
At the conclusion of its two-day monetary policy meeting, the Fed, as expected, kept interest rates unchanged but indicated its continued inclination toward eventual rate cuts, albeit possibly taking longer to materialize than initially thought.
Citi strategists noted in a statement, “While inflation is expected to stay closer to 3% than 2% this year, we anticipate sufficient cooling in inflation to meet the Fed’s criteria for a summer rate cut. The case for cuts will be much stronger if we are correct that softer April jobs data signal further weakening ahead.”
The dollar index, which gauges the U.S. currency against six other major currencies, was at 105.12, after hitting a three-week low of 104.52 on Friday.
The euro saw a 0.07% increase, reaching $1.0765, while the sterling was last seen at $1.2547, marking a 0.02% gain for the day.
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