Yen steadies near 40-year low on rate-hike bets, intervention talks

[BENGALURU/SINGAPORE] The yen recovered slightly from its weakest level in almost four decades on Wednesday (Jul 22), as traders weighed the possibility of intervention from Tokyo, alongside expectations for quicker rate hikes by the Bank of Japan (BOJ).

Pessimism towards the currency has deepened as investors adjust to a shifting policy backdrop under Japanese Prime Minister Sanae Takaichi, whose administration has struggled to shake off perceptions that it may pressure the BOJ to delay further rate hikes. Higher rates typically support a currency.

After lingering around the previous day’s 40-year low of 163.24 to the US dollar, the yen got a sudden boost on Wednesday after Bloomberg News reported BOJ officials are open to raising rates at a faster pace than the consensus among economists.

The yen was last up 0.09 per cent against a slightly weaker dollar, at 163.03.

Japan’s Finance Minister Satsuki Katayama has said authorities would take decisive action if needed to curb excessive currency weakness. Tokyo had intervened in April and May, when the yen weakened beyond the 160-per-dollar level.

Those efforts, however, have done little to reverse the yen’s broader trajectory, which analysts say is being driven by broad-based dollar strength and the BOJ’s still-low interest rates.

“The record shows intervention buys time, not a trend reversal,” Fabien Yip, market analyst at IG, said.

“Absent a genuine shift in BOJ policy, intervention looks set to keep functioning as a circuit-breaker rather than a cure.”

Concerns about political influence over monetary policy intensified after the government, in a final economic blueprint, retained language urging the BOJ to align its policy with that of ​the government.

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“For the first time in years, we didn’t meet a single yen bull during our mid-year investor meetings,” BofA Global strategists wrote earlier this month.

The bearishness towards the yen reflects wider unease as uncertainty over inflation, fanned by the Middle East conflict, has pushed businesses to step up protection against foreign-exchange risk.

“You’re seeing a radical transformation in Japan, driven by the repricing of the Japanese yen,” said Patrick Gauthier, CEO of FX payments firm Convera.

The pound ticked 0.04 per cent lower against the US dollar to US$1.3369, on course for its fifth consecutive day of losses should current levels hold. The British currency also fell 0.11 per cent against the euro to trade at 85.3 pence.

Inflation in the UK cooled by more than expected in June, driven by a fall in petrol prices after a brief de-escalation in the Middle East conflict.

That lowers the odds for rate hikes by the Bank of England, said James Smith, developed markets economist, UK, at ING.

“The latest UK inflation data for June is welcome news for the Bank of England hawks, who worry that the energy crisis risks morphing into a long-lasting bout of price pressure.”

Money markets show traders are fully pricing in one quarter-point increase by the BOE this year, and a roughly 60 per cent chance of a second rate increase.

Inflation was front and centre for investors, as Brent crude futures touched a near six-week peak of US$95.47 per barrel. The yield on the 30-year US Treasury was at 5.14 per cent.

Whenever the 30-year yield breaches 5 per cent, it tends to ripple through global markets, raising the bar for riskier investments and supporting the dollar. A 20-year Treasury auction will be in focus later on Wednesday.

The dollar index, which measures the US dollar against a basket of currencies, dipped 0.03 per cent to 101.15.

“Softer US inflation data has reduced the urgency for additional Federal Reserve tightening, preventing a stronger rally in the dollar,” said Joel Kruger, market strategist at LMAX Group. REUTERS