Dollar surges to level not seen since Bank of Japan pledged unlimited bond buying

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Dollar surges to level not seen since Bank of Japan pledged unlimited bond buying

The dollar roared higher against the yen, which slumped to a level not seen since the Bank of Japan pledged to continue its dovish stance and pledged unlimited bond buying.

The yen's USDJPY fell 1.3% to 130.20 against the dollar, a level not seen in more than two decades.

The ICE Dollar Index DXY, which measures the U.S. dollar against major rivals, climbed 0.4% to 103.39, the highest since January 2017 according to FactSet.

At its policy meeting, the Bank of Japan pledged to buy unlimited 10 year Japanese government bonds TMBMKJP 10 Y, to defend a 0.25% yield level.

They raised their inflation forecasts, now projecting core CPI to reach 1.9% in the current fiscal year ending March 2023 before lowering to 1.1% in the following two fiscal years, according to a team of Deutsche Bank strategists led by Jim Reid.

This has resulted in the Japanese yen being weaker than the other major central banks, like the Fed and the ECB, which have been moving in a hawkish direction over the past few months.

Matthew Ryan, senior market analyst at Ebury said that investor s minds are being driven out of perceived riskier assets because of ongoing lock-downs in China, Russia's war in Ukraine, and the possibility of aggressive central bank hikes in the U.S.

In a note, he said that the risks to growth and the move to higher inflation in the world have triggered one of the most violent selloffs in risk that we have seen in a long time since the start of the COVID 19 pandemic in March 2020.

The dollar could cool later, with the release of U.S. growth data due ahead of the market's open. Economists polled by Dow Jones Newswires and The Wall Street Journal believe that growth will slow down sharply, from 6.9% in the fourth quarter to 1% in the first quarter.

The euro EURUSD was down 0.3% against the dollar at $1.0524 and down 2.7% so far this week.

The common currency has been under pressure due to news that Russia has cut gas supplies to Poland and Bulgaria. While the Federal Reserve is expected to raise interest rates at its early May meeting and keep hiking, many see the European Central Bank unable to do the same. Economists believe that Russia's war in Ukraine will cause a harder hit to Europe's economy, which is struggling to break its reliance on Russian energy supplies than that of the U.S.

Germany s economy ministry said on Wednesday it was revising its 2022 growth forecast to 2.2% from 3.6%, which has put further downward pressure on the euro, said Ryan.

Observers from Martins Kazaks that the bank could raise rates three times this year, including at the July meeting, helped put a temporary floor under the euro, although further downside is likely so long as market sentiment remains fragile, he said.