LONDON (Reuters) — Big global currencies are rarely on different paths. Yet Japan's yen and China's yuan are slumping against the dollar, while in Europe the euro is outperforming, and sterling is on a tear.
With economic and monetary policy outlooks varying, currency moves are increasingly out of sync with each other. This is making the $7.5 trillion-a-day global foreign-exchange market — operating in the aftermath of COVID-19, and the face of war in Ukraine and an energy crisis — more volatile and more unpredictable.
"It used to be the case that if you got the direction of euro/dollar right, you had a good chance of getting everything else right, but now it's a bit harder," said Nomura's G10 FX strategist Jordan Rochester.
"You have to do your homework, and the differences between currencies are widening."
Last year alone, the euro fell to a 20-year low versus the dollar, sterling hit its lowest on record and the yen its weakest in 32 years, as the greenback soared broadly on sharp increases in U.S. interest rates to curb inflation that other major central banks lagged.
Fast-forward, and those moves are far less aligned.
The Bank of Japan has dashed expectations that a change to its ultra-dovish monetary policy would come early in 2023, sending the Japanese yen down 9% so far this year, on top of a 12% decline in 2022. That has raised the chance of intervention to stem weakness.
More pain is also anticipated for the yuan, trading near seven-month lows, as well as smaller Asian currencies.
Meanwhile, the euro is up 2.5% this month against the dollar and expected to rise further given a hawkish European Central Bank. The UK's sterling has risen over 5% so far in 2023, leaving it set for its biggest annual gain since 2017.
"You’ve got to be 120 years old to have any understanding of this."Kit Juckes, head of FX strategy at Societe Generale.
Of course, given what the world has endured in the past few years, it is maybe not surprising that currency markets have gone a little strange.
"We've got a one-in-a-100-years pandemic and once-in-75-years war and a-once-in-25-years energy crisis all thrown into the mix together," said Kit Juckes, head of FX strategy at Societe Generale. "You’ve got to be 120 years old to have any understanding of this."
Rochester said Nomura forecast the euro moving to $1.12 over coming months, implying a further 2% gain from $1.095 now, and expected the yuan to weaken to 7.30 per dollar versus 7.2 now.
The yuan has slid almost 5% so far this year, hurt by a weak economy and a wide interest-rate gap with the United States.