The dollar climbed significantly on Wednesday, and the yen plunged to a 38-year low against the dollar as the wide interest rate differential between the United States and Japan continued to support the dollar, with traders closely watching for any signs that Japan might intervene.
The yen fell to 160.87 yen per dollar during intraday trading on Wednesday, already below the level that led Japanese officials to intervene in the market in April.
Japan's top monetary official, Masato Kanda, warned that the government is watching the yen's movements with a high sense of urgency, saying the yen's recent moves have been "rapid" and "one-sided" and escalating his warnings.
"I am deeply concerned about the recent rapid depreciation of the yen, and we are closely watching market trends with a high sense of urgency," Vice Finance Minister Masato Kanda told reporters late Wednesday.
"We will take necessary actions against any excessive actions," Kanda added. Kanda did not comment on whether the yen's recent moves were excessive.
Kanda's comments reflect the growing urgency within the Japanese government to address the yen's depreciation.
Yen falls to lowest level since 1986
The yen fell to its lowest level since 1986 on Wednesday, sparking speculation that authorities may soon be forced to support the yen again to curb its depreciation.
The dollar index, which tracks the dollar against six major currencies, closed up 0.1% at 106.06 on Wednesday.
USD/JPY closed up 0.72% at 160.76 on Wednesday, hitting an intraday high of 160.87, the highest since December 1986. So far this year, USD/JPY has risen about 14%.
EUR/JPY also rose sharply, rising to 171.79, the highest since September 1992. It closed up 0.3% at 171.625 on the day.
Investors are taking advantage of the huge difference in interest rates between the two countries to adopt the so-called carry trade strategy, in which investors borrow low-yielding currencies to invest in high-yielding currencies. Carry trades have become very popular in recent years as some countries have raised borrowing costs.
Kanda warned earlier this week that authorities were ready to intervene in the foreign exchange market 24 hours a day if necessary
Japanese authorities may intervene again
While Japanese authorities have tried to prevent the yen from falling, the huge interest rate gap between Japan and the United States has been weighing on the yen.
While Japan has raised interest rates to a range of 0 to 0.1% this year, U.S. interest rates are 5.25% to 5.5%, meaning investors have flocked to dollar assets for higher returns.
Japan has admitted to spending 9.8 trillion yen (about $61.3 billion) to intervene in the foreign exchange market between April 26 and May 29. Although no specific dates were disclosed, trading patterns show that the market intervened significantly on April 29 and May 1. Foreign exchange reserve data show that Japan sold U.S. Treasuries to finance these actions.
Kanda has just returned from Seoul, where he participated in talks with his South Korean counterparts. Both countries expressed concerns about the depreciation of their currencies and agreed to find ways to strengthen currency swap agreements.
"In general, interventions tend to slow markets, but unless there is a major change in the underlying monetary policy stance, it is difficult to significantly reverse the direction of the market," said Vassili Serebriakov, a foreign exchange strategist at UBS.
In the case of USD/JPY, the impact would be greater if the Bank of Japan raised rates more aggressively or the Fed started cutting rates. But without these two developments, I am not sure if we can see a major reversal. But intervention will definitely limit its upside."
"If the trend above 160 starts to get messy, they may intervene to buy until the Bank of Japan becomes more hawkish, and the upward trend in USD/JPY is the path of least resistance. Around 161 or slightly above 161 remains the most likely threshold for intervention."
The next focus of the market will be Friday's U.S. personal consumption expenditures (PCE) price index, the Fed's favorite inflation indicator.
Investors will want to see if price pressures are moving in the right direction. A lower-than-expected number could trigger an increase in bets on rate cuts this year, providing some breathing room for the yen.
“PCE is unlikely to get a lot of data compared to when you measure the consumer price index (CPI),” said Eugene Epstein, head of North American structured commodities at Moneycorp. “That being said, it would take a big change in PCE to change the dynamics of a rate cut.”
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2024-06-27
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