By Peter Nurse
Investing.com - The U.S. dollar edged higher Wednesday, with the Japanese yen weakening, as rising commodity prices and expectations of a faster Federal Reserve tightening cycle continued to drive moves.
At 4:10 AM ET (0810 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 98.558.
The dollar has continued to gain strength from Federal Reserve Chair Jerome Powell’s hawkish speech earlier this week, where he signaled the central bank could hike interest rates by more than 25 basis points at upcoming policy meetings if the policymakers feel it necessary to tame inflation.
The Fed raised the benchmark lending rate by a quarter point at their meeting last week, the first increase since December 2018, and signaled six more hikes of that size this year.
U.S. benchmark 10-year yields rose as high as 2.41% early in the Asian session on Wednesday, its highest level since 2019, providing support for the dollar, given the increasing interest rate differentials offered up by the bonds of the other major countries.
This gap is most obvious when compared with Japan’s debt, with the 10-year JGB yielding just 0.22%, and BOJ Governor Haruhiko Kuroda maintaining that Tokyo must maintain its accommodative monetary policy for some time.
USD/JPY rose 0.2% to 121.09, just below the new six-year high of 121.41 seen overnight.
Also weighing on the yen are the higher commodity prices, and energy prices in particular, with Japan importing the bulk of its energy, widening the country's trade deficit.
“A sharply deteriorating trade position on the back of fossil fuel prices and a still dovish central bank leaves the door wide open for USD/JPY to trade up to 125 over coming weeks,” said analysts at ING, in a note.
Elsewhere, EUR/USD edged lower to 1.1025 with U.S. President Joe Biden heading to Europe later Wednesday for talks with European leaders about Russia's invasion of Ukraine.
He is likely to announce plans for more sanctions on Moscow and will likely put pressure on European leaders to boycott Russian oil.
GBP/USD edged lower at 1.3259 despite British inflation rising to a new 30-year high of 6.2% last month, at the very top end of expectations. The Bank of England lifted interest rates last week, already moving to combat these high inflation levels.
Attention will also be on the U.K. Chancellor's Spring Statement later in the session, amid speculation Rishi Sunak will announce support measures to help consumers suffering from a cost of living crisis.
“That the UK's fiscal position has some room to support the economy may provide a little more room for the Bank of England to hike,” added ING.
AUD/USD dropped 0.1% to 0.7457, NZD/USD fell 0.1% to 0.6954, both handing back recent gains, while USD/CNY rose 0.1% to 6.3753.