FX.co ★ Dollar surges versus yen

USD/JPY moved in an uptrend in the morning amid higher government bond yields and the dovish BoJ.

Bullish activity increased earlier on Tuesday, with the dollar rising against the yen for the third-straight session and breaking the 20-year highs on its way up.

During the Asian session, the dollar briefly went above the mark of 132.75, the high unseen since April 2002.

The surge came after a sharp increase in 10-year bond yield that hit the 4-week high of 3.05% this morning.

Additional support comes from concerns about persistent inflation in the US.

The May CPI is scheduled for Friday. If figures stay firm or show growth, it will bolster the Federal Reserve's aggressive stance.This year, the Fed has raised interest rates twice – by 25 basis points in April and 50 basis points in May. The regulator is expected to hike rates by another 50 basis points in June and July.

The recent better-than-expected US labor market results instill optimism about the possibility of a 50 basis-points increase in September.

The more aggressive the Fed becomes, the more dovish the Bank of Japan gets.

Besides, a widening gap between their bond yields is also seen as the driving force for the pair.

To stimulate the economy hit by the coronavirus pandemic, the BoJ strives to keep the 10-year bond yields at the level of 0%.The regulator's rhetoric seems to unlikely change any time soon, as seen from Governor Haruhiko Kuroda's statement yesterday.

On Monday, the policymaker confirmed his unwavering commitment to a yield curve control policy that keeps short-term interest rates below zero and caps the yield on Japan's 10-year government debt.

"It is important for the Bank of Japan to continue its current monetary easing to firmly support economic activity," he said. "We are aiming for a virtuous cycle where prices rise moderately and corporate profits, employment, and wages improve."

After Mr. Kuroda's speech, USD/JPY skyrocketed and headed to the 133.00 target.

When the yen broke through 132.00 versus the dollar in the morning, Japan's Finance Minister Shunichi Suzuki noted: "The government will closely monitor developments in the foreign exchange market, including the recent depreciation of the yen with a sense of vigilance. It's important that exchange rates remain stable, and reflect economic fundamentals."

His words immediately provoked another wave of speculation about possible foreign exchange intervention by the Japanese authorities. However, after Mr. Kuroda's comments, this speculation eased.

"As long as the moves are not too sharp, a weak yen is beneficial for Japan's economy," the governor said.

In light of all recent statements by BoE representatives, analysts expect USD/JPY to break through the barrier of 135.00.Although the greenback now enjoys strong growth potential, a lot will depend on the CPI results.

Meanwhile, Goldman Sachs says the potential of USD/JPY will be limited in the short term due to the high possibility of foreign exchange intervention by the government.

At the same time, there are those who suggest USD/JPY will be bearish. "We consider JPY will continue to benefit from safe-haven flows so long as Japan's current account remains in surplus," CBA strategist Carol Kong said.

"As such, we do not anticipate a repeat of the rapid USD/JPY appreciation seen in March and April," she noted. Instead, the strategist sees the dollar consolidating near the top of the 126-131 range.