Yen sinks as dollar rises to 20-year high

This is an audio transcript of the FT News Briefing podcast episode: Yen sinks as dollar rises to 20-year high

Jess Smith
Good morning from the Financial Times. Today is Friday, April 29th, and this is your FT News Briefing.

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We’ve got the tale of two big tech stocks and also two currencies that are going in very different directions. One’s the US dollar, the other’s the yen.

Tommy Stubbington
The Bank of Japan is effectively throwing its hands up and saying, yep, currency markets you feel free to send the yen down to a 20-year low and we’re going to do nothing about it.

Jess Smith
Meanwhile, the US economy shrank in the first quarter of this year. Plus, we’ve got some big news about Twitter. Well, I hope we didn’t overstate that. I’m Jess Smith, in for Marc Filippino, and here’s the news you need to start your day.

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Amazon yesterday reported its slowest revenue growth ever in the first quarter of this year. That was due to a drop in online retail sales. The company missed Wall Street’s estimates by $4bn, which really upset investors. Amazon shares sank 10 per cent in after-hours trading. Apple, on the other hand, said revenues rose 9 per cent over last year. The standout division was Apple’s services, like the App Store and iCloud subscriptions. It had a record quarter. Revenues rose 17 per cent.

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The world’s biggest economy shrank for the first time since mid-2020. That was just after the start of the pandemic. In the first quarter of this year, US gross domestic product fell nearly one and a half per cent on the year.

Kate Duguid
So the biggest part of the move was driven by the widening of the trade deficit, as well as some effect from lower business inventories.

Jess Smith
That’s the FT’s Kate Duguid.

Kate Duguid
The big story, though, is that the trade deficit widened because imports were so high. But what’s funny is that those imports were as high as they were in part because consumer and business spending continues to be really, really strong. So the headline number kind of masked some of the underlying strength, the continued underlying strength among US consumers and businesses.

Jess Smith
So, Kate, does this make it likely that the Fed’s just going to move forward with its plan to raise rates and accept a technical recession?

Kate Duguid
So the Fed is likely still going to raise interest rates by 50 basis points at their meeting in May. This report shouldn’t do anything to dissuade them from that, in part because of this continued strength of the US consumer end of businesses. The report also showed that prices continue to rise, right? That we still have inflation at its highest levels in 40 years. And that won’t start to change until the Fed raises rates more.

Jess Smith
Kate Duguid is our US capital markets correspondent.

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Currency traders are betting that the Fed will continue raising rates well ahead of other central banks. Yesterday, they piled into the dollar and sent the greenback to a 20-year high. Japan’s currency, meanwhile, sank to a 20-year low. That was after Japan’s central bank said it would stick to its plan to not raise rates. To talk more about these currency moves, I’m joined by the FT’s Tommy Stubbington. Hi, Tommy.

Tommy Stubbington
Hi there.

Jess Smith
Tommy, can you first remind me why currencies go up along with interest rates?

Tommy Stubbington
Well, so all things being equal, if you want to earn a higher return, you can do so in an economy where interest rates are higher, basically where you can get more interest on your cash deposits or on your bonds without having to take any extra risk. It’s not always that simple, but the basic idea is the way to boost your exchange rate is to have higher borrowing costs.

Jess Smith
So how significant is this rise in the dollar, both this latest jump and also the fact that it’s at a 20-year high?

Tommy Stubbington
Well, it’s very significant on both fronts. I mean, first of all, this has been a big move since the start of the year against the other major currencies. I mean, most notably the Japanese yen, as you mentioned. A lot of this is about the Gulf in monetary policy that’s expected to open up between the US and the rest. And kind of Japan stands at the other end of that spectrum. The Bank of Japan has had very low interest rates for a very long time and has really doubled down on the idea that it’s not going to go anywhere fast. But I mean, also in terms of the level, this is the highest in 20 years. We didn’t get to these levels at the height of the Covid crisis, in the financial crisis or any of the other periods between 2002 and now when the dollar has been very strong.

Jess Smith
What’s the immediate impact of the dollar being so strong?

Tommy Stubbington
Well, I mean, we’ve moved from a period when there wasn’t much inflation in the world and kind of everybody wanted to have a weak currency. If you have a weaker currency, it helps your exporters. It helps economies by making their goods cheaper for overseas buyers. Now we have a world of high inflation and everybody is going in the other direction. Everybody is raising interest rates to try and bring down inflation. And part of that is boosting the level of your currency in this new world of higher interest rates. What this tells us is that nobody can keep up with the Fed. And so for the likes of the European Central Bank, the Bank of England, that could complicate their efforts to bring down inflation.

Jess Smith
Meanwhile, the yen is going in the opposite direction, and Japan’s central bankers aren’t doing much to support their currency, are they?

Tommy Stubbington
Yeah, I mean, that’s absolutely true. The Bank of Japan is effectively throwing his hands up and saying, yep, currency markets. Do you feel free to send the yen down to a 20-year low and we’re going to do nothing about it. Now, part of the reason that the Bank of Japan can afford to do that is they don’t have the inflation problem that the US has or that the eurozone has or that the UK has. Inflation has ticked up a bit in Japan, but it’s, you know, by everybody else’s standards it’s still very, very low. So the Bank of Japan can focus on its job of stimulating the economy by keeping rates low without having to worry too much about fighting inflation.

Jess Smith
And is that a good thing?

Tommy Stubbington
A difficult question to answer, because, you know, what goes hand-in-hand with that low inflation is, you know, decades of very, very low growth. I think they would possibly prefer to be in the situation of the Federal Reserve, which definitely has an inflation problem, but at least it has an inflation problem that’s related to a strongly growing economy. The first quarter, the figures notwithstanding, obviously there was the unexpected decline. I think the central banks that find themselves in the most difficult position here, the European Central Bank and the Bank of England, where you have an inflation problem but you have an inflation problem that is happening at the same time as, you know, a pretty nasty hit to growth from the fallout from the war in Ukraine, which has sent oil prices through the roof. You have problems with gas supplies, you know, potentially maybe a European embargo on all Russian gas supplies. That makes energy even more expensive. That’s really going to hurt growth in these economies. At the same time that you see inflation going up and up. And that’s a difficult trade off to navigate if you’re a central banker. Right. Do you focus on inflation and raise interest rates or do you focus more on growth and keep them a little lower?

Jess Smith
Tommy Stubbington is the FT’s capital markets correspondent. Thanks, Tommy.

Tommy Stubbington
Thank you too. Thank you.

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Jess Smith
Twitter reported first-quarter earnings, revenue and user numbers were both up, but the social media company had something else to say about user numbers. It admitted that it overstated them for the last three years, and it’s not the first time. Yesterday’s confession just comes at a sensitive time. Of course, the company is in the midst of a deal to go private in a sale to Tesla CEO Elon Musk.

Tim Bradshaw
Well, the timing is pretty terrible.

Jess Smith
That’s Tim Bradshaw, our global tech correspondent.

Tim Bradshaw
The margin of error is not. It’s a couple of million at the most, in some cases less than that. And that amounts to less than 1 per cent of the reported figures previously. So the margin of error isn’t huge. But when you’ve just struck a very contentious deal with the world’s richest man, who has already taken to, shall we say, voicing strong opinions about your business on Twitter, it’s kind of bad timing and you don’t really want anything to rock the boat at the moment when it’s already being rocked pretty actively by your buyer.

Jess Smith
So Tim, are mistakes with user numbers as serious as mistakes with financial or revenue numbers?

Tim Bradshaw
So the fact that this has actually happened twice, twice over the last few years is something that will raise a question of credibility, the management level or perhaps in the kind of finance department among investors. But as it happens, there’s only really one investor the Twitter has to satisfy at the moment, and that is Elon Musk. Musk has said that his primary motivation for buying Twitter isn’t economic. It’s to do with the platform that it provides the town square of the internet. And these are not things that are generally related to, you know, whether or not the user numbers met the quarterly estimates every three months, which is exactly the kind of quarterly routine and regime that public companies can find it difficult to navigate within when their business is challenged. And part of the reason for Twitter going private is that it provides it an opportunity to transform its business. And Musk has talked about becoming less reliant on advertising and maybe bringing in more subscription-based revenue. It can make that kind of change to the private company without having to answer to Wall Street every quarter.

Jess Smith
Tim Bradshaw is the FT’s global tech correspondent. Thanks, Tim.

Tim Bradshaw
Thanks, Jess.

Jess Smith
You can read more on all these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news. The FT News Briefing is produced by Fiona Symon and Marc Filippino. I’m Jess Smith, the editor of the briefing and this week’s fill-in host. We had help this week from Michael Lello, David da Silva, Peter Barber and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. And our theme song is by Metaphor Music.

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