Forex
Yen’s wild ride: Ups, downs, and Bank of Japan interventions
By Leika Kihara, Pasit Kongkunakornkul, Vineet Sachdev and Kripa Jayaram
(Reuters) – The Japanese yen has been under pressure in the past few years as markets focused on the wide U.S.-Japan interest rate differentials.
The yen lost more than 20% against the dollar since the outset of 2022, prompting several rounds of intervention by Tokyo to prop up the currency in September and October that year. It kept falling despite further intervention in April and May 2024, touching a 38-year low of 161.96 to the dollar on July 3. Japan is suspected to have stepped in again in mid-July to put a floor under the yen.
The yen’s downtrend has reversed in recent days, following the Bank of Japan’s July 31 decision to raise interest rates and ahead of an expected loosening of U.S. monetary policy.
The BOJ’s hawkish move, along with investors’ concerns about U.S. growth, jolted global stock and bond markets. It triggered an unwinding of the carry trade, whereby investors borrow cheaply in yen to invest in higher-yielding assets. The yen rebounded sharply against the dollar, but remains relatively weak by the standards of the past few decades.
The yen’s fluctuations matter because the currency has long provided a cheap source of funding for global investors, even as other central banks raised borrowing costs.
BOJ’S SHIFTING INTERVENTION GOAL
Japanese authorities had historically intervened to prevent the yen from strengthening too much, as a strong yen hurts the export-reliant economy. This trend changed in 2022, when Tokyo stepped in and bought yen to defend its value, after the currency plunged on expectations that the BOJ would keep interest rates ultra-low even as other central banks tightened monetary policy to combat soaring inflation.
In both cases, authorities buy or sell yen, usually against the dollar. The Ministry of Finance decides when to step in and the Bank of Japan acts as its agent.
The decision is highly political because Japan’s reliance on exports makes the public more sensitive to yen moves than in other countries. With many manufacturers now shifting production overseas, the benefit of a weak yen has diminished. Instead, a weak yen has become a pain for households and retailers by inflating the cost of importing fuel and raw material.
Tokyo intervened on April 29 and May 1 this year, according to Ministry of Finance data, to combat the yen’s declines. After the moves failed to reverse the yen’s downtrend, Japanese authorities are suspected by market participants to have intervened again on several occasions in July.
Japanese authorities typically do not confirm whether they intervened in the currency market, and say only that they would take appropriate action as needed against excessively volatile foreign exchange moves.
WHY DID THE YEN WEAKEN IN RECENT YEARS?
Various factors caused the yen’s decline.
First, the U.S. Federal Reserve’s aggressive interest rate rises and the BOJ’s slow pace in normalizing monetary policy kept the gap between U.S. and Japanese interest rates large, thereby keeping the yen less attractive compared with the dollar.
Second, Japan is now importing more fuel and raw material than in the past, which means companies are converting yen into foreign currencies to make payments.
Third, many big Japanese manufacturers that shifted production overseas have reinvested profits abroad, rather than repatriating them. That reduced demand for yen.
WHY ISN’T THE BOJ RAISING RATES MORE RAPIDLY?
The BOJ ended negative interest rates in March and raised its short-term policy rate again to 0.25% from 0-0.1% in July. Governor Kazuo Ueda has signaled the chance of raising rates again if Japan makes further progress toward meeting the central bank’s 2% inflation target, as it projects.
Analysts expect the BOJ to eventually raise interest rates to levels deemed neutral to the economy, around 1% to 1.5% in the next few years. But such a gradual tightening would leave Japanese borrowing costs very low compared with other countries.
Japanese policymakers are cautious about raising rates too aggressively for fear of hurting already-weak consumption and threatening a fragile economic recovery. They are also wary of the risk of triggering a sharp rise in long-term interest rates that would increase the cost of funding Japan’s huge public debt.
WHAT ARE THE DRAWBACKS OF A WEAK YEN?
A weak yen pushes up the cost of importing fuel, food and raw material. That in turn hurts retailers and households through higher living costs.
Inflation data shows that the rate of core inflation, which excludes volatile fresh-food prices but includes fuel costs, has been higher than the central bank target for the past 27 months.
WHAT ARE THE BENEFITS OF A WEAK YEN?
A weak yen, however, is not necessarily all bad for Japan’s economy.
The yen’s decline benefited Japanese export firms by inflating the yen-based profits they earned overseas. The increased profits may lead to higher wages and help underpin consumption.
A cheaper yen also boosts tourism. The number of overseas visitors to Japan has surged over the past couple of years, giving hotels, department stores and others relief after enduring COVID-19 restrictions.
($1 = 146.3100 yen)
By Chuck Mikolajczak
NEW YORK (Reuters) -The euro slumped to a two-year low while the dollar gained on Friday after gauges of business activity were released in each region, while bitcoin again hit a record high as it continued its march toward the $100,000 mark.
HCOB’s preliminary composite euro zone Purchasing Managers’ Index, compiled by S&P Global, sank to a 10-month low of 48.1 in November, below the 50 level that marks expansion from contraction, and the 50.0 estimate.
In addition, Britain’s PMI fell to 49.9 in November, from 51.8 in October. The government’s plan to increase taxes on businesses contributed to the first contraction in private sector activity in over a year, adding to recent indications the economy was losing steam.
But in contrast, S&P Global said its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, increased to 55.3 this month, the highest level since April 2022, after a 54.1 reading in October, with the services sector proving the bulk of the increase.
“It highlights the two-track world. It’s U.S. versus the rest, but even within the U.S. it’s services versus manufacturing,” said Brian Jacobsen, chief economist at Annex Wealth Management in Menomonee Falls, Wisconsin.
“How long can U.S. services make up for the drag from everything else?”
The , which measures the greenback against a basket of currencies, rose 0.41% to 107.50, with the euro down 0.54% at $1.0416 after falling to $1.0333, its lowest since Nov. 30, 2022. The greenback was on track for its third straight weekly advance.
continued its recent rally toward the $100,000 mark that has seen the cryptocurrency surge more than 40% since the U.S. election on expectations President-elect Donald Trump will loosen the regulatory environment for cryptocurrencies. Bitcoin was last up 1.44% at $98,496 after hitting a record $99,697.17.
Investors have scaled back expectations for the path of interest rate cuts from the Federal Reserve recently, currently pricing in a 52.7% chance of a 25 basis point cut at the Fed’s December meeting, down from 69.5% a month ago, according to CME’s FedWatch Tool, as they assess the impact of legislative policies by the Trump administration, such as tariffs, on the economy.
Other central banks such as the European Central Bank and the Bank of England are seen as likely to become more aggressive in cutting interest rates to buttress their economies.
Sterling weakened 0.49% to $1.2528 and was on track for its second straight weekly decline.
Some of the European Central Bank’s most influential policymakers urged the European Union to bring back long-stalled economic integration to protect its model of prosperity from a looming trade war with the United States.
Investors are waiting for Trump to name a Treasury secretary. The Wall Street Journal reported on Thursday that Trump floated the idea of appointing Kevin Warsh, a former member of the Fed’s board of governors, to the post, with the understanding that he could later become Fed chair.
Against the Japanese yen, the dollar strengthened 0.12% to 154.69. The yen had fallen below 156 per dollar last week for the first time since July, sparking the possibility that Japanese authorities may again take steps to shore it up.
Japan’s annual core inflation was 2.3% in October, keeping pressure on the central bank to raise its still-low interest rates.
Just over half of economists in a Reuters poll believe the Bank of Japan would hike in December, in part because of concerns about the depreciating yen in the midst of an improving economy.
Investing.com – The US dollar retreated Monday, handing back some of its recent gains as Donald Trump’s pick for US Treasury Secretary appeared to reassure the bond market, while the euro rebounded from the two-year low seen last week.
At 05:05 ET (10:05 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.6% lower to 106.892, having hit a two-year peak on Friday.
Dollar slips after Trump nomination
President-elect Donald Trump nominated fund manager Scott Bessent to be his Treasury Secretary on Friday, and this has been welcomed by the bond market, with Treasury yields falling back.
However, Bessent has also been openly in favor of a strong dollar and has supported tariffs, suggesting any pullback in the currency might be short-lived.
“We are not sure whether the recent bullish flattening in the US Treasury curve represents the market seeing him as a ‘safe pair of hands’, but he certainly does not sound like someone who will be pushing President-elect Donald Trump into weak dollar policy,” said analysts at ING, in a note.
The main economic focus this week will be Wednesday’s , the Federal Reserve’s preferred gauge of underlying inflation.
This “is expected at a little sticky 0.3% month-on-month and will keep the market guessing over whether the Fed will cut in December after all,” ING added.
Recent stubborn inflation data has seen the Fed take a cautious stance towards further interest rate cuts.
Euro rebounds from two-year low
In Europe, traded 0.6% higher to 1.0476, moving away from Friday’s two-year low of 1.0332 after European manufacturing surveys showed broad weakness last week, while the US surveys surprised on the high side.
This economic weakness has markets pricing in more aggressive easing from the European Central Bank.
“The view here remains there is no fiscal calvary coming in the eurozone and that the only way to address the current malaise is for the European Central Bank to cut rates more quickly than usual,” ING added.
The ECB has cut rates three times already this year but investors now see a 50% chance it will cut by 50 basis points on Dec. 12 instead of the usual 25 given weak growth and rising recession risks.
rose 0.4% to 1.2576, rebounding from hitting a six-week low on Friday after UK disappointed, leading the market to price in an increased chance of rate cuts from the .
That said, Bank of England Deputy Governor Clare Lombardelli said on Monday she was more worried about the risk that inflation comes in higher – not lower – than the central bank has forecast.
“I view the probabilities of downside and upside risks to inflation as broadly balanced,” Lombardelli, making her first speech since joining the BoE in July.
“But at this point I am more worried about the possible consequences if the upside materialised, as this could require a more costly monetary policy response.”
Yen helped by drop in US yields
fell 0.2% to 154.41, after a 0.4% drop in the previous week. The currency pair tends to closely follow moves in Treasury yields, and had risen sharply in the past two months as the yen weakened.
“The Japanese yen is starting to show a little strength on the crosses. Helping that has been the shift in the fiscal-monetary policy mix,” ING added. “At the margin, Japanese fiscal stimulus is encouraging the view that the Bank of Japan will hike in December after all. Nearly 15bp of a 25bp hike is now priced.”
slipped slightly to 7.2447, after rising 0.2% last week.
Investing.com– Most Asian currencies inched up on Monday, while the Japanese yen firmed against the dollar as nomination of fund manager Scott Bessent as Treasury Secretary pulled U.S. bond yields lower and put the greenback on the backfoot.
slipped to 4.351%, as President-elect Donald Trump’s nomination of Bessent saw investors positioning for a more moderate head of the Treasury, especially on the topic of trade tariffs and immigration.
The was last down 0.5% at 106.950, after hitting a two-year peak of 108.090 on Friday. also eased.
The Japanese yen’s pair was 0.4% lower on Monday after a 0.4% drop in the previous week. The currency pair tends to closely follow moves in Treasury yields, and had risen sharply in the past two months as the yen weakened.
The Chinese yuan’s pair was largely flat after rising 0.2% last week, and the Malaysia ringgit’s pair fell 0.3%. The Australian dollar’s pair rose 0.4%.
Dollar loses ground after eight straight weeks of gains
The dollar retreated on Monday after surging for the past eight weeks. Bessent’s nomination as Treasury Secretary weighed on the dollar, amid some bets that he will be a voice of moderation in Trump’s administration.
Still, the dollar’s pullback could be temporary, given that Bessent has openly favored a strong dollar and has also supported trade tariffs.
The greenback is expected to remain supported by Trump’s policies, which are seen as inflationary, and are likely to result in higher-for-longer rates in the U.S. over the coming years.
Meanwhile, market participants also pared back bets for a quarter-point rate cut from the Federal Reserve in December to 52%, compared to 72% a month ago, according .
The (PCE) index, the Fed’s preferred measure of inflation, is scheduled for release the coming Friday, and is expected to provide more cues on interest rates.
Asian economic readings in focus
Singapore dollar’s pair was largely flat after the release of monthly consumer inflation numbers. Data showed that rose 1.4% in October from a year earlier, lower than a forecast of 1.8% due to a moderation in services, electricity and gas, and other goods inflation, official data showed on Monday.
The is scheduled to meet on Wednesday and is widely expected to cut interest rates by 50 basis points again. The New Zealand dollar’s pair rose 0.4% after sliding to a one-year low on Friday.
The Indian rupee’s fell 0.2%, remaining close to recent record highs. India is set to release its third-quarter on Friday.
China will release data for November on Saturday. Before that, data from China is due on Wednesday.
South Korea’s pair was 0.2% lower. The Bank of Korea is set to decide on on Wednesday, and could potentially trim rates further.
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