Photo/Illutration Federal Reserve Chairman Jerome Powell testifies before the Senate Banking Committee hearing on March 3 on Capitol Hill in Washington. (Pool Photo via AP)

LONDON--The dollar rose on Tuesday as Federal Reserve Chair Jerome Powell put the possibility of half-percentage-point interest rate hikes on the table, while the yen fell through the psychological 120 level as the Bank of Japan reiterated its support for ultra-loose monetary policy.

The yen hit a six-year low, down 1.1% to 120.81 at 1230 GMT, having lost around 5% against the dollar this month, as leaping U.S. yields and a deteriorating trade balance suck cash from the world's third-biggest economy.

Yen crosses also suffered, with the euro making a five-month high of 133.30. The Japanese currency slumped to an almost seven-year low against the Swiss franc.

Japan must maintain ultra-loose monetary policy lest inflation hurt the economy, Bank of Japan Governor Haruhiko Kuroda said on Tuesday--contrasting with hawkish overnight comments from Powell.

The Fed chief sent U.S. yields to multi-year highs by putting the possibility of the half-percentage-point rate hikes on the table.

"Rising energy prices and higher U.S Treasury yields are both bad news for the Japanese yen," said analysts at Singapore's UOB in a quarterly outlook note that lifted their year-end dollar/yen forecast from 119 to 121.

Two-year, five-year, 10-year and 30-year Treasury yields all stood at their highest levels since 2019 on Tuesday, widening the gap on Japanese yields while lending the dollar broad support elsewhere.

The euro, hit by the Ukraine war and rising oil prices, fell below $1.10 in early London trading, but had recovered a bit to trade up 0.1% at $1.1032.

Danske Bank analysts said they see the euro diving to $1.05 in 12 months as Fed and European Central Bank monetary policies diverge.

ECB President Christine Lagarde and Chief Economist Philip Lane are expected to give speeches later in the day.

Francois Villeroy de Galhau, an ECB policymaker, said on Tuesday the central bank needs to look through short-term swings in energy prices and keep its focus squarely on underlying inflation trends.

ECB Vice President Luis de Guindos said Russia's war in Ukraine will dent euro zone growth but the block is still set to expand.

British sterling rose to an almost three-week high versus the dollar and to a two-week high against the euro ahead of British finance minister Rishi Sunak's budget update to parliament on Wednesday.

Against a basket of currencies, the U.S. dollar index flattened at 98.452.

Bitcoin jumped to a three-week high, last up 4.2% to $42,902.

Related News