TOKYO, January 21, Reuters -- The safe-haven yen gained while riskier bets like the Australian dollar and cryptocurrencies fell on Friday amid fears of heated inflation and aggressive Federal Reserve policy tightening.
The dollar took a breather after recent gains in U.S Treasury yields stalled, but was still headed for its best week in a month against a basket of major peers ahead of a Federal Reserve policy meeting next week.
Bart Wakabayashi, Tokyo Branch manager of State Street Bank and Trust said the Aussie sank to 81.67 yen, its weakest level in a month, as much as 0.99% of its value was at the mercy of risk sentiment and dollar-yen seems to want to track equity markets.
We're back on a 113 handle, which could be an overshoot, so there's a bit of surprise. He said that there was not a lot of consensus that this is a sustainable direction for the dollar-yen, given the policy divergence between a hawkish Fed and a still dovish Bank of Japan.
We were debating if there would be a hike in March for the Fed, but now we are debating if there will be a 50 point hike in March. Things have changed very quickly. Wall Street suffered a sell off in the final hours of trading, while Treasury yields retreated from multi-year highs overnight. The S&P 500 futures point to a decline of 0.7% at the reopening.
Market expectations that the Fed will tighten monetary policy at a faster pace than anticipated, with the Fed funds futures now fully priced for a rate increase in March and a total of four in 2022, as a result of the surge in U.S. yields.
The Federal Open Market Committee FOMC convenes a two-day policy meeting starting on Tuesday, at the end of which market participants will review the committee's statement regarding the tightening timeline.
The dollar index - which measures the currency against six rivals - fell by 0.05% to 95.714 after touching a more than one-week high of 95.864 on Thursday. It is up 0.58% for the week, rebounding from last week's 0.61% slide.
The euro rose by 0.11% to $1.13225, climbing off its weakest level since Jan. 10. European Central Bank President Christine Lagarde speaks on a panel at the World Economic Forum later in the day about the global outlook.
Since January 11, the pound was close to its lowest since Jan. 11.
The price of cryptocurrencies fell by as much as 6.1% to $38,250 for the first time since August, while smaller peer ether dropped as much as 6.43% to $2,806. The lowest since September was 70.
Analysts predict that the dollar will go up as Fed tightening gets underway, despite recent volatility.
In a client note, strategists at Westpac wrote that they wouldn't be surprised if the dollar index surpasses its 2021 high of 96.938 and the currency should continue to firm into next week's FOMC.
They wrote that a lot is priced in now, but a straight comparison of the dollar index and yield spreads shows that the USD has not fully priced in this story.