The dollar is heading for its biggest yearly gain against the yen in at least 30 years as the Bank of Japan holds fire on rate rises
- The dollar is on pace for its strongest annual rise against the Japanese yen since at least 1992.
- The Federal Reserve is hiking rates aggressively, while the Bank of Japan is sticking to keeping borrowing costs ultra-low.
The dollar is on track for its biggest annual rise against the Japanese yen in at least three decades as the Federal Reserve and Bank of Japan pursue wildly different approaches to monetary policy.
The greenback is up 16.3% to 134.30 yen in 2022 - putting it on track for its biggest annual gain against the yen since at least 1992, according to Bloomberg data. The yen, traditionally considered a safe-haven asset, is now the second worst-performing G20 currency against the dollar this year, after the Turkish lira.
The two currencies are diverging as the US and Japanese central banks adopt different interest rate policies.
The Fed raised US interest rates by three quarter of a point to 1.75% on Wednesday as it tries to reign in soaring inflation. Rising interest rates attract foreign investment, increasing demand for a currency and driving up its value.
Strategists said the Fed's latest increase in borrowing costs could send the dollar to a new all-time high.
"The conversations which used to contain 25 and 50 basis points are now more like 50 and 75," Joe Tuckey, a foreign exchange analyst for Argentex, said. "Those looking to time the top of the historic dollar rally must hang on just that bit longer."
In contrast, the Bank of Japan restated its commitment to ultra-low interest rates Friday. It will keep borrowing costs at "present or lower" levels, prioritizing supporting the economy over curbing inflation.
The bank will also continue buying government bonds — unlike the Fed and the European Central Bank, which have both started slashing their balance sheets through "quantitative tightening". The BoJ is also committed to keeping the yield on the benchmark 10-year Japanese government bond below 0.25%, meaning it must engage in a form of intervention that results in a weaker yen.
The yen slumped against the dollar in Friday trading, falling 1.67% to $0.74. It has lost almost 17% against the US currency in 2022.
"Traders remain JPY sellers," Chris Weston, the head of research for the foreign exchange broker Pepperstone, said. "As many other central banks hike aggressively, the Bank of Japan stays the big doves in the room – they remain the only central bank not tightening."
The dollar isn't just outperforming against the yen. The dollar index - which tracks the US currency against the yen, the euro, the British pound, the Canadian dollar, the Swiss franc, and the Swedish kroner - is up 8.8% to 104.36 year-to-date and is trading around 20-year highs.