NEW YORK, April 20 ― The dollar surged yesterday to a 20-year high against the Japanese yen, underpinned by the divergence in monetary policy between a Federal Reserve determined to keep a lid on soaring inflation and a Bank of Japan that has kept interest rates ultra-low.

The greenback hit ¥128.97 (RM4.27), the highest since May 2002. It was last up 1.5 per cent at ¥128.94. The dollar has risen 5.9 per cent on the yen so far this month, on pace for the largest monthly percentage rise since 2016.

“The BoJ has done the opposite of normalisation. They have dug their heels in,” said Richard Benson, co-chief investment officer at Millennium Global Investments in London.

Benson believes Japanese monetary authorities could actually intervene to strengthen the yen, but it is not about a particular level.

“I wouldn't be surprised if the BoJ intervenes because they have a lot of dollars and they can just sell them easily,” Benson said. “There are obvious numbers to talk about and levels, but the narrative is very much about speed as opposed to level. So slow and gradual is fine.”

Japanese Finance Minister Shunichi Suzuki made the most explicit warning against the yen's recent slump yesterday, saying the damage to the economy from a weakening currency at present is greater than the benefits from it.

Morgan Stanley, in its latest research note, said the yen's decline versus the dollar was justified amid Japan's worsening terms of trade, with soaring raw materials driving up import costs, as well as contrasting inflation outlooks between the countries.

While Japan's core consumer price index (CPI) data, to be released tomorrow, likely rose 0.8 per cent in March from a year earlier, faster than a 0.6 per cent gain in February, the level is still way below the BoJ's long-held inflation target of 2 per cent.

The dollar index, which measures the greenback against six other currencies, also climbed yesterday, rising past 101 for the first time in more than two years. It was last up 0.2 per cent at 100.98.

Providing a dollar lift is the continued rise in US yields. US benchmark 10-year Treasury yields hit 2.93 per cent yesterday, the highest since December 2018, while US 10-year inflation-linked bond yields rose to -0.01 per cent, on the cusp of turning positive for the first time in two years.

Chicago Federal Reserve Bank President Charles Evans, who is not a voter on this year's Federal Open Market Committee, said yesterday he is “comfortable” with a round of rate hikes this year that includes two 50 basis-point increases and reaches a neutral setting by year end, but he does not see the need for bigger hikes.

Evans joins a chorus of Fed speakers who are pushing for front-loading the rate increases.     

The greenback rose to 0.9519 francs versus the Swiss currency, the highest since June 2020. It last changed hands at 0.9513 francs, up 0.7 per cent.

The euro recovered some ground, trading 0.1 per cent higher against the dollar at US$1.0791, but stayed just off last week's two-year low of US$1.0756. ― Reuters