Media365
The Japanese yen hovered near its weakest level in almost four decades on Wednesday as rising oil prices and higher US Treasury yields strengthened the dollar, leaving currency traders increasingly alert to the risk of another intervention by Tokyo.
The yen fell to 163.24 per dollar in New York trading, its weakest level since late 1986. It was trading around 163.21 early in the Asian session on Wednesday.
The yen’s latest slide comes as the dollar benefits from its traditional safe-haven appeal amid the escalating US-Iran conflict. US forces have launched strikes on Iran for an 11th consecutive night, while oil prices have risen sharply on concerns over the impact of the conflict on energy supplies and global shipping.
Oil, US yields pressure yen
Brent crude futures rose to a six-week high of $91.99 a barrel, adding to concerns about imported inflation in Japan and increasing pressure on the yen.
At the same time, US Treasury yields climbed across the curve. The 30-year yield reached a two-month high of 5.15 per cent, while the benchmark 10-year yield touched 4.64 per cent, its highest level since May.
The 10-year yield was holding around that level in early Asian trading.
Higher US yields tend to support the dollar by making dollar-denominated assets more attractive to investors. They also widen the yield gap between the United States and Japan, where interest rates remain comparatively low.
The 30-year Treasury yield crossing above 5 per cent is closely watched by investors because it can have a broader impact on global financial markets. Higher long-term borrowing costs can raise the return investors demand from riskier assets while supporting the dollar.
Markets will focus on a 20-year US Treasury bond auction later on Wednesday for signs of investor demand and the broader direction of US yields.
Japan intervention watch
The yen’s prolonged weakness has intensified concerns about possible intervention by Japanese authorities.
Low interest rates and growing concerns about Japan’s fiscal position have contributed to the yen’s decline over several years. Tokyo carried out record currency intervention in April and May after the dollar-yen exchange rate crossed above 160.
However, the effect of those interventions has faded.
Japanese officials have also shifted away from repeated public warnings and towards a more unpredictable approach intended to keep traders cautious. Authorities could intervene if the yen falls sharply, or even if it continues to weaken steadily towards new lows.
A recent boost for the yen from comments by Japan’s finance minister suggesting that the government pension fund could redirect some foreign investments towards domestic assets has also faded.
Attention has therefore returned to the possibility of direct yen-buying intervention by Japanese authorities.
Analysts at HSBC have said Japan may soon intervene again. However, they noted that intervention alone was unlikely to have a lasting impact unless the Bank of Japan adopted a more aggressive approach to raising interest rates, the US Federal Reserve returned to a rate-cutting bias or investor sentiment towards Japan’s fiscal position improved.
The bank’s base case is for the dollar-yen exchange rate to remain in a higher range of 160-165, with periodic intervention likely to limit further gains but negative real interest rates in Japan continuing to support the dollar.
For Japanese policymakers, the latest yen slide presents a difficult challenge. A weaker currency raises the cost of imported energy and other commodities at a time when oil prices are rising because of the US-Iran conflict.
That could intensify inflationary pressures and increase the political pressure on the government and the Bank of Japan to support the yen.
However, aggressive interest-rate hikes could weigh on economic growth. The Bank of Japan is therefore facing a delicate balancing act as it seeks to contain imported inflation without undermining the economy.
With the yen approaching levels not seen since 1986, markets are likely to remain highly sensitive to any signs of official intervention or a shift in the Bank of Japan’s policy stance.
With inputs from agencies.
