Dollar index hits highest level since 2002

The dollar index hit its highest level since 2002 on Thursday as the dollar shot to two-decade highs on the yen after the Bank of Japan (BOJ) doubled-down on its super-low yield policy by offering to buy endless amounts of bonds every session as needed

That saw the U.S. currency vault 2.16% to 131.2 yen, levels not seen since 2002. It also brought the dollar’s gains for April to more than 6%, while the dollar index rose to 103.85

There had been some market speculation the BOJ might step back a little given inflation was rising and other major central banks were tightening, but it showed no hesitation

The uber-dovish decision set it far apart from the Federal Reserve, where markets are priced for 150 basis points (bps) of hikes in just three meetings, and triggered a fresh rush of funds into the dollar ahead of all else

“After weeks of confusing comments about the yen from government officials, the BOJ has cut through with a clear message — the global inflation surge is ex-Japan, so zero rates will remain,” said Sean Callow, a senior currency strategist at Westpac in Sydney

“USD/JPY 130 may be a round number but it cannot be a red line, with attention likely to turn quickly to 135, the 2002 high,” he added. “The yen is not being ignored, but it is mostly a side effect for the BOJ

While the BoJ keeps yields near zero, markets are wagering the Fed will hike rates by 50 bps in May, June and July, and ultimately reach 3.0% by the end of the year

Yields on 10-year notes have climbed 45 bps this month alone to 2.80%, opening a gulf between Japanese debt.The euro also slid to $1.05

The currency is now perilously close to huge chart support levels stretching from $1.05 down to a trough from 2017 at $1.0344. A break would take it to depths not seen since 2002 and risk a damaging decline below parity

The slide only adds to Europe’s economic troubles as it raises the cost of energy priced in dollars, just as natural gas costs soar on Russia’s move to cut off supplies to Poland and Bulgaria

“This appears to be the first overt act of energy warfare,” warned Helima Croft, head of global commodity research at RBC Capital Markets

“The question now is whether the cut-off will extend to other major importers in what could quickly become a stark test of European resolve to support Ukraine in the face of surging energy prices and rising recession risks

Such risks could also make the European Central Bank reluctant to tighten aggressively, leaving it lagging far behind the Fed. Markets currently see the ECB maybe reaching 0.5% by Christmas

One possible pothole for the dollar will be data on U.S. gross domestic product due later on Thursday

While the market forecast is for growth of 1.1%, the risk is to the downside after the U.S. trade deficit blew out to a record and implied a large drag from net exports

Analysts at NatWest Markets now fear GDP may have actually contracted by an annualized 1.3% in the first quarter. Any negative reading could temper the dollar’s ascent, if only temporarily