Dollar extends losses; yen hits new highs after Abe resignation

A Japanese 1,000 yen banknote sits on a pile of South Korean won banknotes for an arranged photograph at a Woori Bank Co. branch in Seoul, South Korea.
SeongJoon Cho | Bloomberg via Getty Images

The dollar fell on Friday as the U.S. Federal Reserve's new policy framework suggested that interest rates would remain low, while the yen surged after Japanese Prime Minister Shinzo Abe announced his resignation.

The yen significantly strengthened against the dollar after the news that Abe, Japan's longest serving prime minister, would step down due to worsening health.

Concerns about a possible shift away from Abe's expansionary economic policy, known as Abenomics, drove the move in the safe-haven currency, investors said. The dollar was last down 1.0% against the yen at 105.45.

"You're seeing yen strength on a little bit of uncertainty," said Lou Brien, strategist at DRW Trading in Chicago. "Abenomics has been one of the more influential economic strategies." The greenback resumed its slide against a basket of major currencies in the wake of Fed Chair Jerome Powell's remarks at the virtual Jackson Hole conference. Powell said the U.S.
central bank would seek to keep inflation at 2%, on average, so that periods of too-low inflation would likely be followed by an effort to lift inflation above 2% for some time.

In practice, market participants expect that this means the current ultra-low rates will stay lower for longer, thereby pressuring the dollar. After recovering from an initial slide on Thursday immediately after Powell's speech, the dollar weakened once again overnight. The dollar index was last 0.5% lower at 92.513.

As the dollar weakened, the euro climbed 0.4% to $1.1875. The euro's ascent puts it closer to a technical level of $1.19, said Brien, which it has tested periodically over the last month.

"If it goes through it, it could be a significant moment," he said. "The (Fed's) new stance on inflation gives it an opportunity to retest it." Currency markets were broadly pro-risk. The New Zealand dollar hit its highest against the U.S. dollar since January while the Australian dollar rose to its highest since December 2018. The U.S. dollar also lost around 1.0% to the Norwegian crown and 0.8% to the Swedish crown.