By Vidya Ranganathan
SINGAPORE (Reuters) – The Japanese yen hit its highest level against the dollar since January on Monday as markets continued to move in a week that began after weak U.S. employment data stoked recession fears and expectations of deeper interest rate cuts by the Federal Reserve.
Friday’s jobs data, which came on top of a string of weak earnings reports from major tech companies and growing concerns about the Chinese economy, sparked a global sell-off in stocks, oil and high-yielding currencies as investors sought safety in cash.
The sell-off continued on Monday, with US Treasury yields continuing to decline, stock indexes in the red, Bitcoin falling, and the dollar losing ground mainly against the yen.
High-yielding currencies such as the Indian rupee and Mexican peso fell, while currencies that had been used until now to finance investments, such as the yen and the US dollar, rose strongly.
The yen, the preferred currency for financing acquisitions, rose to 143 yen to the dollar, up 2.3% against the greenback, a level not seen since Jan. 2. The yen rose to 142.20 yen to the dollar.
The Swiss franc, another popular financing currency, rose more than 1% to 0.8488 against the dollar.
The euro rose 0.2 percent to $1.0937 and fell 0.4 percent to 102.72, while the Australian dollar was at $0.6488 and fell 0.36 percent.
“The market is expecting a 50 basis point rate cut by the Fed at its September meeting, which I think would be overdone,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo.
“The US economy is showing signs of slowing down, but it’s not as bad as the market expects.”
However, he said the near-term momentum could keep the selling in check, with technical levels also pointing to further yen gains.
Treasury yields have fallen sharply since last week, when the Federal Reserve kept interest rates in their current range of 5.25% to 5.50% while Fed Chairman Jerome Powell opened the door to the possibility of a rate cut in September.
But by Friday, after data showed the unemployment rate had risen, raising speculation that the U.S. economy could be heading into recession, expectations of a rate cut deepened.
Yields on 10-year U.S. Treasury notes fell about 40 basis points last week, the biggest weekly decline since March 2020, and last stood at 3.75%.
According to CME FedWatch, Fed Funds futures reflect traders’ estimates of a greater than 80% chance of a 50 basis point rate cut at the central bank’s September meeting. Futures are signaling a 155 basis point rate cut this year, with a similar cut in 2025.
The yen has jumped 14% against the dollar over the past three weeks, driven in part by the Bank of Japan’s 15 basis point interest rate hike last week to 0.25%, along with its announcement of a plan to halve its monthly bond purchases over the next two years.
The Japanese currency was the most bought among the G10 currencies, so “the ceiling for near-term outperformance appears high,” Barclays analysts said.
A two-day rout in stock markets late last week marked a 10% correction from a record high hit in early 2022. Stocks in Europe and Asia also fell, with the index losing 24% over three days, putting it in bear market territory.
The closely watched 2- to 10-year U.S. Treasury yield curve fell to its lowest level since July 2022 late last week, reflecting recession fears and expectations of a sharp easing in short-term yields.
Meanwhile, markets are also dealing with the risk of military escalation in the Middle East after recent developments in the war between Israel and Hamas in Gaza, which pushed oil prices to their lowest levels since January.
The US is deploying more troops to the Middle East and Europe after threats from Iran and its allies Hamas and Hezbollah to respond to the killing of Hamas leader Ismail Haniyeh two days ago in Tehran.
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