Japan’s yen hit a six-month low against the U.S. dollar Thursday, while trade tensions are still permeating financial markets. It seems the yen has given up its haven status in the eye of rising U.S. Treasury yields.
“The rise in dollar-yen over ¥111 probably owes to firm U.S. yields at a time when U.S. equities are remaining bid,” said Chris Turner, head of FX strategy at ING. “Here the $1.5 trillion in U.S. tax cuts have likely delivered insulation for U.S. equity markets.”
U.S. Treasury yields inched higher across the curve Thursday, with the 10-year note TMUBMUSD10Y, -0.06% last yielding 2.850%.
In the past, a flattening yield curve has helped the dollar higher against the yen. And the curve, that is, the differential between yields of bonds with different maturities, has been flattening ever since the Federal Reserve moved to tighten its ultraloose monetary policy in December 2015.
“Here, the typically held view is that the relative rise in short-end U.S. rates relative to the long end makes dollar hedging costs disproportionately expensive,” Turner said. That in turn would lead Japanese investors to reduce their rolling dollar hedges, which drives up dollar demand.
On Thursday, the dollar climbed to its highest level since January against Japan’s currency, fetching ¥112.47.
One event could derail these dynamics: Should China — one of the largest buyers and holders of U.S. government debt — decide to use its Treasury holdings to make a statement in the trade war of words with the U.S., for example by announcing the intention to diversify into European government debt, Treasury yields would take a huge toll. Interest-rate expectations would stop being the main driver of U.S. government bonds if one of its biggest holders turned its back.
So far, analysts have said this move was unlikely,