Forex
Politics, Fed seen swaying Japan’s yen intervention thinking
© Reuters. FILE PHOTO: Coins and banknotes of Japanese yen are seen in this illustration picture taken June 16, 2022. REUTERS/Florence Lo/Illustration
By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters) -The Federal Reserve’s Jackson Hole symposium this week looms as a key risk for Japanese authorities worried that new hawkish signals from U.S. central bankers could trigger another sharp yen selloff that would force Tokyo to prop up the currency.
The annual gathering of Fed officials and other global policymakers has historically been an opportunity for central bankers to regroup and flag their next big steps to markets.
Until recently, investors had expected Fed Chair Jerome Powell might be looking to end to interest rate hikes amid signs inflation was moderating.
The worry now for Japanese officials is that he signals the opposite as price pressures linger, which could trigger a repeat of last year’s yen selloff against the dollar, forcing authorities to intervene again.
While the yen’s fortunes are largely a product of dollar movements, the currency’s weakness has become politically problematic not only for Prime Minister Fumio Kishida but also the Bank of Japan, whose ultra-loose monetary settings have been blamed for inflating import costs.
“Authorities aren’t worried about the weak yen as much as they were around September and October last year,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities.
“But the chance of intervention will heighten if a worsening economy hurts the administration’s approval ratings.”
Money markets expect the Fed to maintain rates in the current 5.25%-5.5% range until the second quarter next year before starting to ease. But investors will be looking for clues about possible additional rate hikes from Powell’s speech on Friday.
BOJ Governor Kazuo Ueda is scheduled to attend the Jackson Hole meeting, which has thrown Japan curve balls in the past.
In 2010, former Fed Chair Ben Bernanke’s suggestion of deploying quantitative easing triggered a yen spike that forced then BOJ head Masaaki Shirakawa to cut short his stay at the retreat, and call an emergency meeting in Tokyo to ease monetary policy.
This time around, concerns centre on yen weakness.
To be sure, Japan has not been as worried by recent bouts of yen selling, issuing fewer verbal warnings even as the dollar breached the 145 mark that triggered intervention last year.
With the pace of yen declines moderate and a revival of inbound tourism turning the public’s attention to the benefits of a weak currency, authorities see the threshold for yen-buying currency intervention fairly high compared with last year.
But the more passive approach could change if hawkish comments by Powell drive up the dollar/yen at a faster speed, say three government officials with direct knowledge on Japan’s currency policy.
“Japan likely won’t intervene as long as the moves are gradual,” one of the officials said. “It’s really about cracking down on speed limit violations.”
The yen lost about 1.5% against the dollar this month, much slower than a 4.8% dive seen in the three weeks to Oct. 21 last year when the dollar hit a 32-year high above 150 yen.
POLITICS OF 150
While authorities say that speed – rather than levels – is key in deciding when to step in, a breach of the 150 yen threshold could heighten political pressure on Prime Minister Kishida to act, the officials say.
With his approval ratings sliding, Kishida on Tuesday unveiled a plan to cushion the blow from rising fuel costs driven in part by the weak yen.
“When to intervene has always been an extremely political decision in Japan. Nowadays, it’s the prime minister that ultimately makes the call,” said Atsushi Takeuchi, a former BOJ official who was involved in Tokyo’s market foray a decade ago.
“Authorities usually don’t have a specific line-in-the-sand in mind. But key thresholds like 150 are important for political reasons, as they are easy to understand.”
Japan’s dilemma runs deep. Core inflation exceeded the central bank’s 2% target for 16 straight months in July as firms continue to pass on higher import costs driven in part by the weak yen.
Worried about hurting a fragile economy, the BOJ has stressed its resolve to keep interest rates ultra-low even as it decided last month to raise a cap on long-term bond yields.
The BOJ’s dovish tone, coupled with prospects that U.S. interest rates could stay higher for longer, has kept the dollar hovering around a nine-month high of 146.565 yen hit last week.
But while the Fed and worries about China’s economic woes could bring yen moves back into focus, there are doubts intervention would actually achieve much.
“Authorities could smooth the pace of currency moves,” said Daisaku Ueno, chief currency strategist at Mitsubishi UFJ (NYSE:) Morgan Stanley Securities. “But they can’t affect levels or trend, which depends largely on U.S. monetary policy.”
HONG KONG/SHANGHAI (Reuters) – Hong Kong has no intention and sees no need to change the system that pegs the city’s currency in a tight band to the U.S. dollar and has the ability to defend it, the chief executive of Hong Kong’s de facto central bank said on Thursday.
Eddie Yue made the remarks amid recent strength in the Hong Kong dollar, which surged to a 3-1/2 year high against the U.S. currency last week, not far from testing the strong end of the system’s trading band.
Under Hong Kong’s Linked Exchange Rate System (LERS), the financial hub’s currency is confined to a range between 7.75 and 7.85 to the greenback, and the Hong Kong Monetary Authority (HKMA) is committed to intervening to maintain the band.
“Despite the recent interest in LERS and even speculation regarding potential geopolitical shocks, the Hong Kong dollar market has continued to operate smoothly in accordance with the design of the LERS,” Yue said in a statement posted on HKMA’s website.
“And let me reiterate, we have no intention and we see no need to change the LERS.”
The financial hub has sizeable foreign reserves of over $420 billion, equivalent to about 1.7 times its monetary base, which Yue said meant “ensuring the smooth functioning of the LERS at all times”.
A string of factors, including seasonal funding shortages, buying by mainland Chinese investors and listed companies’ increasing dividend payments contributed to the tight liquidity in Hong Kong and underpinned the currency, traders and analysts said.
Yue said the HKMA was paying close attention to discussions about the exchange rate system, which has weathered numerous economic cycles and multiple financial crises.
“As a small, open economy and major international financial centre, exchange rate stability is crucial for Hong Kong,” Yue said, dismissing the view that a strengthening Hong Kong dollar alongside the greenback would hinder the city’s economic recovery.
Analysts at Barclays (LON:) expect the Hong Kong dollar to stay close to 7.75 per dollar in January, but look for it to weaken subsequently.
“We think global factors are likely to keep sentiment subdued and support , especially after the positive impulse from dividend payouts by HK-listed firms and (as) IPO activity fades,” they said in a note published this week.
“The onshore buying of Hong Kong stocks may continue due to lack of better investment alternatives, but it would need more foreign participants to buy Hong Kong stocks for HKD demand to be lifted more durably.”
By Gabriel Burin
BUENOS AIRES (Reuters) – Brazil’s real currency is forecast to trade slightly stronger, at around 6 per U.S. dollar at the end of 2025 following a punishing year of losses, a Reuters poll of foreign exchange analysts showed.
The real fell around 22% in 2024, mainly due to investor disappointment about a fiscal package introduced by President Luiz Inacio Lula da Silva’s economic team to correct worrying debt trends.
Losses in Brazilian assets only stopped after Brazil’s central bank sold nearly 10% of its reserves throughout the last three weeks of 2024. The real has now stabilized following last month’s meltdown to a record low.
But like many other emerging market currencies, there is little prospect for making much positive headway this year so long as the U.S. retains its dominance in currency market bets.
The currency is expected to trade at 5.94 per dollar in one year, 2.7% stronger than its closing value of 6.10 on Tuesday, according to the median estimate of 25 analysts polled Jan. 3-8.
“Pressure on the real was exacerbated by the market’s negative perception of progress of the government’s spending cut package in Congress,” analysts at Sicredi wrote in a report.
“Despite the (central bank) intervention, unfavorable dynamics for the Brazilian currency continue to be a significant challenge.”
In December, Banco Central do Brasil (BCB) sold $22 billion of its reserves in spot foreign exchange markets and another $11 billion through repurchase agreements. It has not intervened again in the first days of 2025.
“Higher yields in the U.S. and the perception of greater fiscal risk in Brazil should keep the currency at the new level (6 per dollar),” analysts at Banco Inter wrote in a report.
U.S. Treasury yields edged higher on Tuesday after data showed the U.S. economy remained resilient, supporting market expectations the Federal Reserve may have only one quarter-point interest rate cut left to deliver.
Latin American currency strategists are also waiting for what U.S. President-elect Donald Trump announces after his inauguration on Jan. 20, wary of any potential plan to apply sweeping tariffs that could hit the Mexican peso even further.
The currency fell nearly 19% in 2024 on tariff fears as well as concerns related to controversial judicial reforms.
The peso is forecast to trade at 20.90 per dollar in 12 months, or 2.8% weaker than its value of 20.31 on Tuesday.
(Other stories from the January Reuters foreign exchange poll)
(Reporting and polling by Gabriel Burin in Buenos Aires; additional polling by Indradip Ghosh and Mumal Rathore in Bengaluru; Editing by Alexandra Hudson (NYSE:))
Investing.com – The US dollar steadied Thursday, underpinned by rising Treasury yields after hawkish comments from the Federal Reserve and strong economic data furthered bets on a slower pace of rate cuts.
At 04:35 ET (09:35 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded largely unchanged at 108.920, just shy of the two-year high it touched last week.
Trading ranges are likely to be limited Thursday, with US traders on holiday to honor former President Jimmy Carter, with a state funeral due later in the session.
Dollar retains strength
The of the Fed’s December meeting showed policymakers increasingly geared towards a slower pace of rate cuts in 2025 amid new inflation concerns, while recent jobs data has pointed to underlying strength in the labor market.
Additionally, Fed officials saw a rising risk that the incoming Trump administration’s plans may slow economic growth and raise unemployment.
This has seen the yield on the benchmark 10-year U.S. Treasury note hitting its highest level since April in recent days.
“The market now prices a pause at the 29 January meeting and does not fully price a 25bp cut until June,” said analysts at ING, in a note. “We have five Fed speakers later today, but the next big impact on expectations of the Fed easing cycle will be tomorrow’s December NFP report, where some see upside risks.”
“Equally, the dollar is likely to stay strong into Trump’s inauguration on 20 January.”
German economic weakness weighs on euro
In Europe, fell 0.1% to 1.0306, remaining close to the two-year low it hit last week on recent signs of economic weakness, particularly in Germany, the region’s largest economy.
and rose more than expected in November, according to data released earlier Thursday, but the outlook for the eurozone’s largest economy remains weak.
Exports increased by 2.1% in November, while industrial production rose by 1.5% in November compared to the previous month.
However, “this rebound in industrial activity unfortunately comes too late to avoid another quarter of stagnation or even contraction,” said Carsten Brzeski, global head of macro at ING.
The is widely expected to ease interest rates by around 100 basis points in 2025, and this, slough with concerns over US tariffs, could see the single currency fall to parity with the US dollar this year.
traded 0.5% lower to 1.2296, falling to its weakest level since April on concerns surrounding the UK bond market as British government bond yields hit multi-year highs.
“The gilt sell-off has … dented that confidence in sterling and the risk now is that sterling longs get pared as investors reassess sterling exceptionalism,” ING added.
Yuan weakens after inflation data
In Asia, rose 0.3% to 7.3542, with the Chinese currency remaining close to its weakest levels in 17 years after barely grew in December, while the shrank for a 27th consecutive month.
The print showed little improvement in China’s long-running disinflationary trend, and signaled that Beijing will likely have to do more to shore up economic growth.
dropped 0.2% to 158.08, with the Japanese currency boosted by average cash earnings data reading stronger than expected for November.
The data furthered the notion of a virtuous cycle in Japan’s economy – that increasing wages will underpin inflation and give the Bank of Japan more impetus to hike interest rates sooner, rather than later.
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