Yen shrugs off tepid bond demand, dollar firms on trade deal hopes

Mint

28-05-2025

By Ankur Banerjee and Johann M Cherian
SINGAPORE (Reuters) -The Japanese yen was steady on Wednesday as ructions in the bond market kept the spotlight on the fiscal health of major economies, while the U.S. dollar was firm due to upbeat economic data and signs of easing trade tensions.
The yen cut its losses to trade flat at 144.445 per dollar after dropping 1% on Tuesday in the wake of reports that Japan will consider trimming issuance of super-long bonds after a sharp rise in yields in recent weeks.
The focus remained on the Japanese bond market, with demand at an auction of Japan's longest-tenor bonds on Wednesday falling to the lowest since July.
The 40-year JGB yield spiked to a record high last week as worries about the debt load in Japan and other developed markets like the United States led to a selloff in the longest-dated bonds across the globe.
On Wednesday, yields on Japanese government bonds were elevated as were U.S. Treasury yields, but the reaction in the market was fairly muted.
"The (Japan) bond auction today is somewhat a little bit weaker than expected ... what this goes to show is that there's a lot of focus on the trajectory of debt and deficits globally," said Michael Wan, senior currency analyst at MUFG.
The yen has gained nearly 9% so far in 2025 due to dollar weakness and safe-haven flows as investors flee U.S. assets in the wake of the erratic trade policies under President Donald Trump that have roiled markets.
Frances Cheung, head of FX and rates strategy at OCBC, said the market reaction to the soft auction result had been muted so far, "probably as the bond sales had already been expected to suffer a bit after the latest richening in the bond."
Fiscal worries are front of mind for investors after Moody's downgrade of the U.S. credit rating on a rising debt burden this month and soft demand for a U.S. Treasury Department bond auction last week that lifted 30-year Treasury yields above 5%.
The euro was 0.2% weaker at $1.1306 after dropping 0.5% in the previous session as a bout of dollar buying hit the markets amid signs of possible trade deals and data showing U.S. consumer confidence in May was much better than expected.
Still, new orders for key U.S.-manufactured capital goods plunged by the most in six months in April as the flip-flopping tariff salvos take a toll on the economy and businesses.
The U.S. dollar was also boosted by Trump's decision to delay higher tariffs on the European Union over the weekend.
EU officials have asked the bloc's leading companies and CEOs for details of their U.S. investment plans, two sources familiar with the matter told Reuters, as Brussels prepares to advance trade talks with Washington.
Sterling last bought $1.34885 but stayed close to the three-year high touched on Monday. Worries about Britain's stretched finances have also weighed on investor appetite for the country's debt.
The dollar index, which measures the U.S. currency against six rivals, was last 0.25% higher at 99.776 but is down 8% for the year as investors look for alternatives to U.S. assets.
Investors will watch out for the April Personal Consumption Expenditure report - the Federal Reserve's preferred inflation gauge - on Friday that could help gauge the impact of Trump's trade policies.
The Australian dollar last fetched $0.6436 as data showed consumer inflation held steady in April, leaving hopes for more interest rate cuts mostly intact. Last week, the Reserve Bank of Australia lowered interest rates by 25 basis points.
The New Zealand dollar firmed 0.29% to $0.5966 after the country's central bank signalled it might be nearer to an end to easing than some in the market had hoped for as it cut rates by 25 bps as expected.
(Reporting by Ankur Banerjee and Johann M Cherian in Singapore; Editing by Jamie Freed)