Saturday, January 28

Yen cedes knee-jerk gains after Abe shooting, euro-dollar hovers near parity

Safe-haven demand briefly lifted the yen on Friday after former Japanese prime minister Shinzo Abe was shot while campaigning for a parliamentary election, while the dollar’s strength continued to keep the euro hovering just above parity.

The single currency has hit successive 20-year lows this week on signs the euro zone economy will tip into recession, but it rose off earlier session lows as markets adjusted some bets ahead of monthly US jobs data.

Abe, Japan’s longest-serving leader, died on Friday after being shot as he spoke in the western city of Nara.

The yen rose as much as 0.5% immediately after the news of the shooting but later ceded most of those gains and by 6:47 am ET, it was up 0.1% at 135.89.

While Abe was renowned for his signature “Abenomics” policy featuring bold monetary easing and fiscal spending, analysts played down the impact of the shooting on markets.

“It’s a risk-off environment so the yen is performing better. It’s incredibly sad news but it seems like an isolated event and also we are talking about a former politician here,” said ING Bank strategist Francesco Pesole.

Focus stayed on the euro which is down around 3% against the dollar this week as investors worry about the economic impact of an energy crisis brought on by the uncertainty of gas supply from Russia.

The single currency fell 0.8% to a fresh two-decade trough against the dollar of $1.00720 at 0744 GMT. It then recovered some losses and was last down 0.2% to $1.01430.

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The US dollar index meanwhile surged to new two-decade highs of 107.790, and last stood 0.2% firmer against a basket of currencies at 107.220.

“Chances of euro dollar hitting parity are non-negligible either today or in coming days,” said Pesole.

“The general dollar momentum remains strong and concerns about the euro zone economic outlook is feeding into concerns the ECB can deliver as much tightening as markets are pricing”.

The European Central Bank is preparing to kick off rate hikes this month but will still lag the policy tightening pace of the Federal Reserve and most other central banks.

After a first 25-basis point rate hike this month, a larger increase may be warranted in September, ECB governing council member Ignazio Visco said.

Sterling was set for a second consecutive weekly decline against the dollar, but its 0.9% fall this week is relatively modest amid political chaos that Prime Minister Boris Johnson has seen resign. The pound was down 0.3% on the day to $1.1989.

As energy prices take the wind out of confidence and growth in Europe, investors are growing concerned about the US economy, even though recent data has beaten forecasts.

US non-farm payrolls figures (USNFAR=ECI) are the next indicator, due at 1230 GMT, with economists forecasting some 268,000 jobs added in June.

A stronger figure could allay recession worries, but would probably add to rate hike bets, further lifting the dollar.

Two of the Fed’s most vocal hawks on Thursday said they would support another 75 basis-point interest rate increase later this month but a downshift to a slower pace later.

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