Forex
IMF sees recent yen falls as reflecting fundamentals
© Reuters. FILE PHOTO: Banknotes of Japanese yen are seen in this illustration picture taken September 23, 2022. REUTERS/Florence Lo/Illustration/File Photo
By Leika Kihara
MARRAKECH, Morocco (Reuters) -The yen’s recent declines are driven by fundamentals and do not meet any of the considerations that would call for authorities to intervene in the currency market, a senior International Monetary Fund official said on Saturday.
“On the yen, our sense is that the exchange rate is driven pretty much by fundamentals. As long as interest rate differentials remain, the yen will continue to face pressure,” Sanjaya Panth, deputy director of the IMF’s Asia and Pacific Department, told reporters.
Authorities in Japan are facing renewed pressure to combat a sustained depreciation in the yen, as investors bet on higher-for-longer U.S. interest rates while the Bank of Japan remains wedded to its super low interest rate policy.
The IMF sees foreign exchange intervention as justified only when there is a severe dysfunction in the market, a heightening of financial stability risks, or a de-anchoring of inflation expectations, Panth said.
“I don’t think any of the three considerations are existing right now,” he said, when asked whether recent yen falls call for authorities to intervene in the currency market.
Japan bought yen in September and October last year, its first foray in the market to boost the currency since 1998, to stem sharp declines that eventually pushed the yen to a 32-year low of 151.94 to the dollar.
The dollar fetched 149.57 yen on Friday.
The BOJ has been a dovish outlier among a wave of central banks raising interest rates, even as cost-driven price rises have kept inflation above its 2% target for more than a year.
BOJ Governor Kazuo Ueda has stressed the need to keep rates ultra-low until inflation durably stays around 2% backed by robust demand and sustained wage increases.
Panth said there were more upside than downside risks to Japan’s near-term inflation outlook as the economy was running near full capacity, and price rises were increasingly driven by solid demand.
But he said it was “not yet the time” for the BOJ to raise short-term rates due to uncertainty on how slowing global demand could affect Japan’s export-reliant economy.
In the meantime, the BOJ should continue to take steps that allow long-term interest rates to move more flexibly to lay the groundwork for an eventual monetary tightening, he said.
The BOJ guides short-term rates at -0.1%. It also sets a 0% target for the yield under its yield curve control (YCC) policy. As rising inflation put upward pressure on yields, the bank loosened its tight grip on long-term rates by raising a de-facto cap for the yield in December last year and July.
“What it did in December and July to increase flexibility on long end of the yield curve, was very much steps in the right direction,” Panth said.
Investing.com – The US dollar was trading higher on Thursday, the first day of 2025 trading, on hopes that U.S. growth will beat peers, a more hawkish Fed stance and expectations for the incoming Donald Trump administration.
At 12.30 ET (5:30 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.8% higher to 109.170.
Dollar to remain in demand in 2025
The index rose 7% in 2024 as traders drastically cut back Fed rate-cut expectations in the wake of the projections of the policymakers after the December policy-setting meeting.
The US central bank projected just two 25 bp rate cuts in 2025 at its last policy meeting of the year, a sharp reduction from the four cuts it had indicated in September.
In fact, markets are currently only pricing in 42 bps of cuts from the US central bank in 2025, with the return of Donald Trump to the White House adding a degree of uncertainty given his policies of looser regulation, tax cuts, tariff hikes and tighter immigration are seen as both pro-growth and inflationary.
Focus turns to the release later in the session of weekly numbers as well as the December number, for clues towards the strength of the US economy.
In Europe, traded 0.9% lower to 1.0258, following the more than 6% drop in 2024.
Data released earlier Thursday showed that manufacturing activity in the eurozone declining at a faster rate at the end of the year, offering scant signals of an imminent recovery.
HCOB’s final , compiled by S&P Global, dipped to 45.1 in December, with the downturn broad-based as the bloc’s three largest economies – Germany, France and Italy – were stuck in an industrial recession.
Traders expected more interest rate cuts from the European Central Bank in 2025, with markets pricing in 113 basis points of easing, much more than the Federal Reserve.
This divergence in Fed & ECB policy “will push the euro to parity vs the dollar in the course of 2025,” said analysts at ABN Amro, in a note.
traded 1.2% lower to 1.2366, adding to the fall of 1.7% last year, but was nevertheless the best-performing G10 currency versus the dollar.
UK rose in December, according to mortgage lender Nationwide, jumping by 0.7% in monthly terms during December, following a 1.2% increase in November.
The resilience of the UK housing market has surprised many given indications of weakening activity across the wider economy, with prices ending the year 4.7% higher than their level of December 2023, up from 3.7% in November – the highest annual growth rate since late 2022.
The held interest rates unchanged last month after consumer prices rose above target, and this central bank is likely to remain more cautious than its eurozone counterpart in 2025.
Slowing Chinese manufacturing growth
In Asia, rose 0.6% to 7.3435, climbing to its highest level in over a year after data showed that the country’s manufacturing sector grew less than expected in December.
The reading came just days after government PMI data also showed weaker-than-expected growth in the manufacturing sector.
The prints ramped up concerns over a slowing economic recovery in China, with recent stimulus measures having provided only limited support.
traded 0.35% higher to 157.79, amid a mostly dovish outlook for 2025 from the Bank of Japan.
Investing.com– Most Asian currencies moved in a flat-to-low range on Friday, pressured by strength in the dollar as traders positioned for a slower pace of interest rate cuts by the Federal Reserve in 2025.
Regional trading volumes remained slim on account of the new year holidays, with Japanese markets remaining closed until next week.
The Chinese yuan was among the worst performers in Asia, hitting its weakest level in nearly 16 months as a Financial Times report said the People’s Bank of China will cut interest rates further in 2025.
The yuan, along with its regional peers, was also nursing steep losses in 2024, as the dollar benefited from a hawkish Fed and the prospect of protectionist policies under incoming President Donald Trump.
Dollar at 2-yr high as rate cut bets ease
The and fell 0.1% in Asian trade after racing to a fresh two-year high on Thursday.
The greenback’s latest round of gains came after weekly data read stronger than expected, indicating that the labor market remained strong. A strong labor market gives the Fed more headroom in considering future monetary easing.
The central bank signaled during its December meeting that it will cut interest rates at a substantially slower pace in 2025, citing concerns over sticky inflation.
Resilience in the U.S. economy also gives the Fed less impetus to cut rates, although the Atlanta Fed’s was revised lower for the fourth quarter on Thursday.
Chinese yuan weakens as PBOC flags more rate cuts
The Chinese yuan was among the worst performers in Asia, with the pair rising nearly 0.4% to 7.3275 yuan- its highest level since September 2023.
The FT reported that the PBOC will cut interest rates further in 2025, as the central bank pivots to a more conventional monetary policy structure under a singular benchmark interest rate.
The monetary policy reform comes as a slew of liquidity measures largely failed to stimulate China’s economy over the past two years. This is expected to elicit more monetary easing by the PBOC, which bodes poorly for the yuan.
The yuan was already nursing losses for the week, as purchasing managers index data released earlier showed slowing growth in China’s manufacturing sector.
Broader Asian currencies moved in a tight range, but were nursing steep losses in recent months as traders positioned for a slower pace of U.S. rate cuts in 2025.
The Japanese yen’s pair fell 0.1% after hitting an over five-month high in late-December.
The Australian dollar’s pair rose 0.2%, while the South Korean won’s pair fell 0.2% amid repeated assurances of financial stability from the government.
The Indian rupee’s pair steadied at 85.8 rupees after hitting a record high above 86 rupees earlier this week.
The British pound continued its historical trend of starting the year on a weak note, marking a seventh consecutive year of losses on the first trading day after New Year’s Day.
Deutsche Bank (ETR:) analysts noted that the pound fell over one percent today, contributing to a long-term pattern where sterling has only posted three positive returns on the first trading day of the past twenty years.
The bank’s analysis suggested that the pound’s performance is not isolated, as the Euro against the U.S. dollar () has shown a similar pattern, though slightly less pronounced. The movements in the Cable, the term used for the currency pair, often align with the repricing of relative interest rates at the start of the year.
However, today’s interest rate movements were minimal, despite a downward revision in the UK’s manufacturing PMI and more favorable unemployment claims data from the U.S.
Deutsche Bank attributed the additional underperformance of the pound to a “beta of the technical breaks” from last year, referencing the fall of the Euro to last year’s lows and the decline of the pound to multi-month lows.
The technical analysis suggests that these breaks in key support levels have contributed to the downward pressure on sterling.
Looking ahead, Deutsche Bank found no strong pattern that would indicate whether the initial losses of the pound on the first trading day would reverse or continue in the week following.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
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