Yen Depreciates Further, Reached New Lows, Prompting Japanese Authorities to Act

The value of the Yen has recently reached new lows, prompting Japanese authorities to consider taking action in response to these market challenges.

The Japanese yen depreciated to a new 38-year low against the US dollar and an unprecedented low against the euro on Wednesday. The currency’s decline persisted, with Japanese authorities largely refraining from intervening due to the potential risks associated with such action.

The value of the US dollar slightly decreased in comparison to a group of other currencies, continuing its decline from Tuesday. This occurred after dovish remarks made by Federal Reserve Chair Jerome Powell overshadowed a strong domestic employment report.

The euro maintained Its strength, supported by a persistently high local inflation reading on Tuesday. This suggests that the European Central Bank will take a cautious approach before reducing interest rates again. The British pound remained stable in anticipation of the UK election scheduled for Thursday.

The Japanese yen experienceed a depreciation of up to 0.3%, reaching a value of 161.94 against the US dollar, marking its lowest point since December 1986. Additionally, the yen reached an unprecedented low of 173.80 against the euro.

Japanese officials have maintained a reserved stance regarding the yen’s recent fluctuations this week. Finance Minister Shunichi Suzuki briefly addressed the matter on Tuesday, indicating that the government is closely monitoring the situation. Notably, he refrained from reiterating the previously issued caution that the ministry is prepared to take action.

Atsushi Mimura will assume the role of currency czar at the Ministry of Finance at the end of this month, succeeding Masato Kanda. Mr. Kanda oversaw the substantial intervention of 9.8 trillion yen (approximately $60.67 billion) over several days in late April and early May, during which the currency depreciated to 160.82 yen per dollar.

"Right now, the FX market is challenging the Japanese authorities to do something. You do get the sense that markets will keep pushing dollar/yen higher until Japan policymakers respond," said Michelle Metcalfe, head of macro strategy at State Street Global Advisors.

There was speculation that the Japanese authorities might take action on Thursday, when the market liquidity would be low due to a U.S. holiday, which could amplify market movements.

Market analysts have also suggested that the potential for a second Donald Trump presidency could influence the yen’s performance. This is because Trump’s policies are generally perceived as likely to result in higher U.S. bond yields, which tend to have a corresponding impact on the dollar-yen exchange rate.

"A Trump presidency would likely bring higher fiscal deficits, inflation and yields at the mid- to long-end of the U.S. rate curve, countering the impact of Fed rate cuts," and the rising risks of that have moved the goalposts higher for USD/JPY," said Tony Sycamore, a markets analyst at IG.

The dollar Index, which serves as a gauge of the currency’s relative strength against a basket of major peers including the euro, sterling, and yen, experienced a slight decline of 0.1%, settling at 105.61.

The Fed's Powell said at a European Central Bank conference in Sintra, Portugal, on Tuesday that the U.S. economy has made significant progress on inflation, even as he added that more supportive data is needed to start cutting interest rates.

U.S. data overnight showed job openings had increased in May after posting outsized declines in the prior two months. The closely watched monthly payrolls report is due on Friday.

Euro zone inflation eased last month, but a crucial services component remained stubbornly high, fuelling concerns that domestic price pressures could stay at elevated levels.

The euro rose 0.15% to $1.0761.

Sterling edged up 0.1% to $1.26995, after rising 0.28% on Tuesday.

The Labour Party, the opposition party, is widely anticipated to secure a victory in the upcoming election on Thursday, thereby concluding 14 years of governance by the Conservative Party. Given the current state of the United Kingdom’s financial situation, any newly formed government will have limited capacity to augment expenditures, potentially eliminating a factor that has contributed to the depreciation of the pound sterling and maintaining a manageable level of market volatility.

In other markets, the Australian dollar experienced an increase of 0.2% to $0.668. This rise was influenced by retail sales data that exceeded expectations, indicating the potential for another interest rate hike by the Reserve Bank.

The Chinese yuan experienceed a depreciation, reaching an eight-month low in offshore trading. This development suggests a shift in the stance of local authorities, who appear to be more accepting of the currency’s decline. Additionally, the Caixin/S&P Global services purchasing managers’ index (PMI) recorded its lowest reading since October, contributing to the yuan’s depreciation.

The CNY closed the onshore session at 7.2734 against the USD, marking its weakest close since November 14, marginally above the lower limit of the daily trading band at 7.2738.

July 03, 2024