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The dollar surged to a 29-month high against the yen on Friday as signs began to tilt towards a divergence in the monetary policies of the US and Japan.
Minutes from the Federal Reserve’s last open market committee meeting in December remained fairly dovish, with growth concerns still apparent, but the fact that members had discussed the possible ending of quantitative easing later this year was taken by the market to be a hawkish development.
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Investors had expected only details of the switch to outright Treasury purchases after “Operation Twist” – which swapped shorter term Treasury securities for longer dated bonds – came to an end.
In contrast, Japan has turned firmly down the path of monetary easing, continuing its asset purchase scheme, while the new administration puts pressure on the Bank of Japan to do more – including setting a 2 per cent inflation target.
Later on Friday the US Bureau of Labor Statistics releases the monthly non-farm payrolls data that show the number of jobs created in the US in December. The consensus expectation is for 153,000 new jobs, and analysts said that a number above this could now boost the dollar further as it would give Fed hawks more ammunition to call for an end to QE this year.
Hans Redeker at Morgan Stanley said: “The yen is likely to lose its safe haven status, become a funding currency, and may trade in future like the dollar did in the past.”
On Friday, the dollar climbed 0.8 per cent to Y88.20. The euro was up 0.6 per cent to Y114.77, while sterling advanced 0.6 per cent to Y141.51.
The dollar was also higher against both the euro and sterling. The pound fell 0.2 per cent to $1.6042 after the UK’s services sector slowed by more than expected.
Purchasing manager data showed that activity in the UK’s dominant services industries contracted in December. The index fell to 48.9 from 50.2 in the previous month, its lowest reading since December 2010 when heavy snowfall across the UK stifled output.
The euro fell 0.2 per cent to $1.3015 after eurozone PMI was confirmed at 47.8 in December, in line with the preliminary estimate.
The strong rally seen for commodity currencies early in the week, on relief over the fiscal cliff talks and stronger than expected Chinese business activity surveys, had faded by the end of the week.
On Friday, the Australian dollar – which had climbed 1.1 per cent versus its US counterpart on Wednesday – fell 0.4 per cent to $1.0421. It remained higher against the yen, however, up 0.5 per cent to Y91.96.
