Yen Gains as Recession Fears Grip Markets
The Japanese yen surged against the US dollar on Monday, extending gains triggered by weak US labor data last week. The data, coupled with disappointing earnings reports from major tech companies and concerns over the Chinese economy, sparked a global selloff in stocks, oil, and high-yielding currencies. Investors sought the safety of cash, driving the yen, a popular safe-haven and carry-funding currency, higher.
The yen traded at 145.43 against the dollar, up 0.8%, after hitting a mid-January peak of 145.28 earlier in the day. The euro remained flat at $1.091, while the dollar index was nearly unchanged at 103.17. The Australian dollar, however, fell 0.25% to $0.6495.
Analysts believe the market is overestimating the possibility of a 50 basis point rate cut by the Federal Reserve in September. While the US economy is showing signs of slowing down, it is not as severe as the market anticipates. However, near-term momentum could keep the selloff going, with technical levels suggesting further yen gains.
Treasury yields have been falling sharply since last week, when the Federal Reserve kept interest rates unchanged but Chair Jerome Powell opened the door to a potential rate cut in September. However, data showing a jump in the unemployment rate deepened expectations for rate cuts.
The yen has gained 10% against the dollar in just over three weeks, partly driven by the Bank of Japan's 15 basis point rate hike last week. The central bank also announced a plan to halve its monthly bond purchases over the next two years.
The recent market turmoil has also impacted equities. The tech-heavy Nasdaq Composite experienced a 10% correction from its record high earlier this year. European and Asian markets also plunged, with Japan's Nikkei index losing nearly 5% for the week.
Meanwhile, the US two-year-to-10-year yield curve narrowed its inversion, reflecting both recession fears and expectations for sharp easing of short-term yields. Additionally, markets are grappling with the risk of military escalation in the Middle East following the latest developments in the conflict between Israel and Hamas in Gaza. This has pushed oil prices to January lows.