Tokyo’s previous support is losing force, while traders are watching a critical exchange-rate threshold and reassessing the Bank of Japan’s next move.
On August 14, the Japanese yen was headed for its biggest weekly decline in three months. The effect of currency interventions by the United States and Japan in late July and early August is fading, leading market participants to believe that fresh official action may be needed to curb further losses.
The yen lost around 1% this week and traded at 159.43 per dollar. It has already surrendered roughly half of the gains it made following the interventions. Before the July intervention, the exchange rate was approaching 164 yen per dollar, while traders view the 160-yen level as a potential trigger for fresh action by Japanese authorities.
The Japanese currency’s decline could be its most significant since May, when it also began losing ground after authorities made another purchase of yen. Meanwhile, the yen weakened by around 0.8% against the euro to 183.91 yen per euro, its largest weekly drop since April.
At the start of trading on Friday, the yen was relatively stable. However, the currency has been under pressure for years due to traditionally low interest rates, as well as concerns over government spending and financing. Before the interventions, the yen had fallen to levels close to its lowest in nearly four decades.
In the broader currency market, conditions remained mostly calm this week. The dollar was supported by higher oil prices and tensions in the Middle East, although softer U.S. employment and inflation data reduced expectations of further rate hikes.
Data released the previous day showed that U.S. producer prices were unchanged in July. Following the report, markets lowered their estimate of the probability of a rate hike in September to around 35%.
The euro fell 0.2% over the week to $1.1536. Sterling was little changed, trading near $1.3489. The New Zealand dollar slipped on Thursday after unexpectedly low inflation expectations, but later recovered its losses: the swaps market maintained an 85% probability of a rate hike in September. The Australian dollar held near $0.7060.
The market awaits action from the Bank of Japan
Mitsuhiro Furusawa believes that Japan could resort to fresh joint interventions to support the yen at any time. He also suggests that the Bank of Japan may signal interest rate increases sooner than expected.
Investors have already revised their forecasts for the Bank of Japan’s monetary policy following comments by U.S. Treasury Secretary Scott Bessent. He noted that currency interventions should be supported by policies and fundamental factors that underpin the yen.
It is not particularly surprising that the yen has given back some of its gains.
– Sim Moh Siong
OCBC strategist Sim Moh Siong stressed that the Bank of Japan’s actions will determine whether intervention can alter the yen’s long-term trend.
For intervention to change the yen’s trend, we need to see a more hawkish stance from the Bank of Japan, which the market is trying to price in, but confirmation is also needed. The Bank of Japan needs to step up.
– Sim Moh Siong
According to Tokyo Tanshi, the market puts the probability of a Bank of Japan rate hike in September at 76%. By comparison, this figure stood at 24% on July 30. At the same time, elevated expectations create a risk of another weakening of the yen if the regulator’s decision disappoints investors.
The offshore yuan traded near 6.7452 per dollar on Friday, not far from the three-and-a-half-year high reached last week. The South Korean won, which was also supported by government dollar sales coordinated with Japan last month, remained firmer than the yen. However, it was heading for a modest 0.6% weekly decline against the dollar.
In my view, interventions, even when coordinated and fairly powerful, are temporary at best and, at worst, an invitation for the market to test them.
– Omar Slim
The yen’s further trajectory will depend on whether Japan backs its currency operations with clearer signals on interest rates and measures capable of strengthening confidence in the national currency.
