Forex
What would Japanese intervention to boost the weak yen look like?
© Reuters. FILE PHOTO: A banknote of Japanese yen is seen in this illustration picture taken June 15, 2022. REUTERS/Florence Lo/Illustration/File Photo
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By Leika Kihara
TOKYO (Reuters) -Japanese authorities are facing renewed pressure to combat a continued yen fall driven by market expectations that the Bank of Japan will keep interest rates ultra-low, even as other central banks tighten monetary policy to curb inflation.
Aside from verbal intervention, Japan’s government has several options to stem what it considers excessive yen falls. Among them is to intervene directly in the currency market, buying large amounts of yen, usually selling dollars for the Japanese currency.
Below are details on how yen-buying intervention could work, the likelihood of this happening and challenges of such a move:
LAST YEN-BUYING INTERVENTION?
Japan bought yen in September, its first foray in the market to boost its currency since 1998, after a Bank of Japan (BOJ) decision to maintain ultra-loose policy drove the yen as low as 145 per dollar. It intervened again in October after the yen plunged to a 32-year low of 151.94.
WHY STEP IN?
Yen-buying intervention is rare. Far more often the Ministry of Finance has sold yen to prevent its rise from hurting the export-reliant economy by making Japanese goods less competitive overseas.
But yen weakness is now seen as problematic, with Japanese firms having shifted production overseas and the economy heavily reliant on imports for goods ranging from fuel and raw materials to machinery parts.
WHAT HAPPENS FIRST?
When Japanese authorities escalate their verbal warnings to say they “stand ready to act decisively” against speculative moves, that is a sign intervention may be imminent.
A rate check by the BOJ, a practice in which central bank officials call dealers and ask for the price of buying or selling yen, is seen by traders as a possible precursor to intervention.
LINE IN THE SAND?
Authorities say they look at the speed of yen falls, rather than levels, and whether the moves are driven by speculators, in deciding whether to step in.
Market players, however, see the first threshold at 145 yen to the dollar, where Japan last intervened. If the dollar breaks above that, 150 yen could be the next line in the sand, analysts say.
WHAT TRIGGER?
The decision is highly political. When public anger over the weak yen and a subsequent rise in the cost of living is high, that puts pressure on the administration to respond. This was the case when Tokyo intervened last year.
But while inflation remains above the BOJ’s 2% target, public pressure has declined as fuel and global commodity prices have fallen from last year’s peaks.
If the pace of yen declines accelerates and draws the ire of media and public, the chance of intervention would rise again.
The decision would not be easy. Intervention is costly and could easily fail, given that even a large burst of yen buying would pale next to the $7.5 trillion that change hands daily in the foreign exchange market.
HOW WOULD IT WORK?
When Japan intervenes to stem yen rises, the Ministry of Finance issues short-term bills, raising yen it then sells to weaken the Japanese currency.
To support the yen, however, the authorities must tap Japan’s foreign reserves for dollars to sell for yen.
In either case, the finance minister issues the order to intervene, and the BOJ executes the order as the ministry’s agent.
CHALLENGES?
Yen-buying intervention is more difficult than yen-selling.
While Japan holds nearly $1.3 trillion in foreign reserves, they could be substantially eroded if Tokyo repeatedly spent huge for yen.
That means there are limits to how long Japan could keep defending the yen, unlike for yen-selling intervention – where Japan can essentially print yen by issuing bills.
Japanese authorities also consider it important to seek the support of Group of Seven partners, notably the United States if the intervention involves the dollar.
Washington gave tacit approval when Japan intervened last year, reflecting recent close bilateral relations.
But stepping in repeatedly would be difficult, as Washington traditionally opposes intervention except in cases of extreme market volatility.
By Karen Brettell
NEW YORK (Reuters) -The dollar dipped on Friday but was on track for its strongest weekly performance in a month on expectations that the U.S. economy will continue to outperform its peers globally this year and that U.S. interest rates will stay relatively higher.
A still solid labor market and stubbornly high inflation have lifted Treasury yields in recent weeks and boosted demand for the U.S. currency.
New policies under the incoming Donald Trump administration, including business deregulation, tax cuts, curbs on illegal immigration and tariffs, are also expected to boost growth and add to price pressures.
The was last down 0.28% on the day at 108.91, after hitting a two-year high of 109.54 on Thursday. It is on track for a weekly gain of 0.85%.
Despite recent dollar gains there remains considerable uncertainty over when policies will be introduced by the new U.S. government, and what their ultimate impact will be. That could pause the dollar rally in the near-term.
“We’re likely to see a bit of a dollar pullback as the administration comes in because all these proposed tariffs – they’re going to take some time to implement and we don’t actually know if all of these proposals are going to be implemented or not,” said Helen Given, FX trader at Monex USA in Washington.
“As we move through the second half of this calendar year I think we’re going to see some more dollar strength,” Given said.
The dollar briefly pared losses after data on Friday showed that U.S. manufacturing moved closer to recovery in December, with production rebounding and new orders rising further.
The euro faces a weaker growth outlook and may be hurt by U.S. tariffs, with the European Central Bank expected to cut rates further than the Federal Reserve this year.
Traders are pricing in 100 basis points rate cuts by the ECB by year-end, and only a less than certain chance of 50 basis points of cuts by the Fed.
Uncertainties including the French budget battle and German elections are also weighing on the single currency.
The euro was last up 0.39% at $1.0305 but was headed for a 1.22% weekly decline, its worst since early-November.
Sterling gained 0.41% to $1.2431. It was on track to lose roughly 1.15% for the week, the most since early November.
The dollar slid 0.26% to 157.11 Japanese yen, holding just below a five-month high of 158.09, reached in December.
The Japanese currency has suffered from the wide interest rate differential between the U.S. and Japan, with the Bank of Japan’s caution over further rate increases spelling more pain for the yen.
China’s hit its weakest level in over a year at 7.3199 per dollar, as falling yields and expectations of more domestic rate cuts continued to weigh on the currency.
In cryptocurrencies bitcoin gained 1.59% to $98,658.
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.
By Karen Brettell
NEW YORK (Reuters) -The U.S. dollar jumped to a two-year high on Thursday in the first day of 2025 trading, building on last year’s strong gains on expectations U.S. growth will beat peers and keep U.S. interest rates relatively elevated.
The Federal Reserve has indicated that it will be more cautious in cutting interest rates as inflation remains stubbornly above its 2% annual target and the economy remains strong.
Policies by U.S. President-elect Donald Trump are also expected to boost growth and potentially add to upward price pressures.
“In terms of 2025 economic growth, there’s no rival to the dollar,” said Adam Button, chief currency analyst at ForexLive in Toronto.
“Capital flows dominate the turn of the year and the U.S. stock market has really put to shame every other global market,” Button added. “The dollar is the only game in town until there is a genuine stumble in the U.S. economy.”
Data on Thursday confirmed a still solid jobs market. The number of Americans filing new applications for unemployment benefits dropped to an eight-month low last week, pointing to low layoffs at the end of 2024.
The was last up 0.77% on the day at 109.38.
The euro dropped 1.01% to $1.025, its lowest since November 2022.
The single currency accelerated losses after it broke below the $1.03 level, indicating that technical factors were deepening the sell-off.
Traders anticipate deep interest rate cuts from the European Central Bank in 2025, with markets pricing in at least four 25-basis-point cuts, while not being certain of even two such moves from the Fed.
ECB policymaker Yannis Stournaras said on Thursday he expected the bank’s main interest rate to be cut to 2% by the autumn, from 3% currently.
Sterling, which held in better than most major currencies against the greenback last year, fell 1.19% to $1.2368, its lowest since April. Its fall accelerated after it broke through resistance around $1.2475.
The dollar gained 0.47% to 157.61 Japanese yen.
It reached a five-month high above 158.09 yen in late December, potentially putting pressure on the Bank of Japan, which is expected to raise interest rates early this year, but perhaps not imminently.
languished at 14-month lows as worries about the health of the world’s second-biggest economy, the prospect of U.S. import tariffs from the Trump administration and sliding local yields weighed on investor sentiment. CNY/
In cryptocurrencies, bitcoin rose 2.77% to $97,404.93.
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