Yen Slides as Dollar Gains Ground on Economic Data

Yen Slides as Dollar Gains Ground on Economic Data

The Japanese yen weakened against the US dollar on Tuesday, retracing some of its sharp gains from the previous session. This reversal came as suspected intervention by Japanese authorities faded, and strong US economic data boosted the dollar.

The yen fell 0.88% against the greenback, trading at 157.73 per dollar. However, it remained above its 34-year low of 160.245 hit on Monday, when traders attributed a five-yen strengthening to yen-buying intervention by Tokyo.

The dollar index gained ground after data showed US labor costs increased more than expected in the first quarter. This rise in wages and benefits confirmed the surge in inflation earlier in the year, likely delaying a much-anticipated interest rate cut later this year.

Analysts believe the trend for dollar/yen remains upward. They see a convergence of policy divergence or a more sustainable bid in the US bond market as potential factors that could drive dollar/yen lower. However, a change in rhetoric from the Bank of Japan (BOJ) is also considered a possibility.

Japanese officials may have spent around 5.5 trillion yen ($35.05 billion) supporting the currency on Monday, according to BOJ data released on Tuesday.

Meanwhile, the BOJ left its plan for monthly bond buying unchanged for May. Investors are looking for clues on the timing of a taper, which could lead to higher, more attractive yields and support the yen.

The Federal Reserve began its two-day monetary policy meeting on Tuesday. While no rate changes are expected, Chair Jerome Powell's comments will be closely watched for signs of the central bank's policy path in light of recent economic data.

Markets have pushed back expectations for a rate cut this year, with odds for a cut in September of at least 25 basis points just below 50%.

The dollar index gained 0.52% at 106.24, with the euro down 0.42% at $1.0674. Sterling weakened 0.49% at $1.2499.

The dollar index was up 1.7% for April and poised for its biggest monthly gain since January. The euro is down 1.11% for the month, and Sterling is down 1.02%, on track for its biggest monthly drop since September.

Bank of America technical strategist Paul Ciana believes a supported and stronger US dollar is the firm's base case. They advocate for buying the greenback dips in anticipation of another leg higher in the second quarter.

French and eurozone inflation data released on Tuesday boosted confidence that the European Central Bank (ECB) will be able to start lowering interest rates in early June. However, euro zone inflation held steady as expected in April, while a crucial indicator on underlying price pressures slowed.