Dollar Holds Strong as Yen Weakens Amid Falling Japanese Yields

LONDON: On Tuesday, the dollar strengthened as investors felt reassured by U.S. President Donald Trump's choice to postpone increased tariffs on the European Union, whereas the yen faced pressure due to a significant decline in Japan's long-term bond yields. Due to the U.S. and UK markets being closed for a public holiday on Monday, analysts noted that some traders were still responding to Sunday's news about Trump postponing tariffs on the EU. Although that news lifted the euro on Monday, it was also seen as favourable for the dollar, which remained strong on Tuesday, with the dollar index recently rising about 0.4 per cent.

"I would speculate it is due to Trump pulling back over the weekend." "Markets were closed yesterday, resulting in only a minor shift; now that the UK is back, we’re witnessing a rebound from the movement observed on Friday," stated Commerzbank FX analyst Michael Pfister. The strength of the dollar was most apparent against the yen. The dollar increased 0.75 per cent  to 143.91 yen as yields on long-dated Japanese government bonds dropped significantly following a Reuters article indicating that the Ministry of Finance would evaluate reducing the issuance of super-long bonds due to recent sharp yield increases for those notes. "It's a significant shift, so it's clearly pulling down the currency," stated Francesco Pesole, FX strategist at ING, regarding the decline in Japanese bond yields. "The yen likely remains the G10 currency, excluding the dollar, that has the most domestic influences."

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Japanese Finance Minister Katsunobu Kato stated on Tuesday that the government is monitoring the debt market carefully, while Bank of Japan Governor Kazuo Ueda mentioned that the central bank needs to remain alert regarding increasing consumer prices in Japan, indicating its willingness to continue raising rates. Global bond yields, especially on the longer end, have soared due to rising worries about increasing fiscal deficits in developed countries, spearheaded by the U.S. and Japan. Focus shifted to discussions in the U.S. Senate regarding Trump's tax-cut legislation, which is anticipated to contribute to the debt burden in the largest economy globally. Markets have reacted sensitively to Trump's plan, especially following Moody's downgrade of the U.S. sovereign credit rating on May 16.

Last week, the U.S. House of Representatives approved a rendition of Trump's tax-reduction proposal, which is projected to increase the federal government's debt by approximately $3.8 trillion compared to the current $36.2 trillion over the next ten years, as per the Congressional Budget Office. On Sunday, Trump stated that the legislation is expected to undergo "significant" modifications during its debate in the Senate. In recent months, investor trust in U.S. assets has been shaken due to Trump's unpredictable tariff strategies. In the most recent case, Trump retreated from his proposed 50 per cent tariffs on EU imports starting June 1, causing the euro to surge to a one-month peak. The euro recently dropped 0.3 per cent against a generally strong dollar at $1.1346, while the pound fell nearly 0.2 per cent to $1.3542, and the dollar advanced 0.6 per cent against the Swiss franc to 0.8258.