Dollar Index Loses Momentum as Yen Faces Pressure from GPIF Report

The major foreign exchange rates have stabilized after a recent surge in volatility. The dollar index, which hit a fresh year-to-date high of 102.54 yesterday, has since lost some of its upward momentum. Meanwhile, the yen remains under pressure following a modest sell-off triggered by a Bloomberg report suggesting Japan’s Government Pension Investment Fund (GPIF) did not discuss portfolio allocation during its September meeting. This news has pushed the USD/JPY pair back above 158.00.

Despite yesterday’s correction, the yen has been the best-performing G10 currency since late August, strengthening alongside the US dollar. Consequently, non-USD yen crosses, such as EUR/JPY, have trended lower, with EUR/JPY falling around 4.5% since the end of August. The Bloomberg report has dampened expectations that the GPIF might shift assets toward domestic investments, which could have supported Japanese government bonds (JGBs) and the yen. The report also follows reassuring comments from Prime Minister Takaichi, who emphasized fiscal sustainability and market confidence during an extraordinary session of parliament.

Long-term borrowing costs in Japan have reached fresh highs, though yields at the ultra-long end of the curve have been more stable compared to other major bond markets. The 30-year JGB yield has risen by 11 basis points since the end of August, compared to around 43 basis points in the US. The Japanese yield curve has flattened sharply as the Bank of Japan (BoJ) accelerates its monetary tightening plans. Demand for JGBs remains strong, as evidenced by a recent 10-year JGB auction, which recorded a bid-to-cover ratio of 3.76, above the one-year average of 3.21.

According to Reuters, the BoJ may signal this month that underlying inflation has roughly hit its 2% target, reinforcing expectations of a December rate hike. The BoJ’s recent economic data, including Tokyo inflation and the Tankan survey, supports this view. However, the Tankan survey also indicates that corporate inflation is moving sideways, not necessitating an immediate policy response. The BoJ’s faster pace of rate hikes has provided additional support for the yen, alongside the threat of further intervention if needed.