Yen surged on intervention rumors, dragging the dollar lower, while strategists see higher odds of coordinated action as policy divergence supports JPY.
The U.S. dollar-Japanese yen rate dropped to its lowest level since early November amid rumors of a coordinated intervention by both countries to prop up the yen. The rumor originated from press reports, citing sources, that stated the New York Federal Reserve, acting as the fiscal agent of the U.S. Treasury, had conducted rate checks on the pair’s exchange rate.
According to a Reuters report, a rate check is an inquiry by officials with traders to find the price they would get if they entered the market. This is a practice typically used by monetary authorities to signal their readiness to enter the market.
Bloomberg reported that Japan’s Chief Cabinet Secretary Minoru Kihara said at a regular briefing on Monday that the country will closely coordinate with the U.S. and act in accordance with their joint finance ministers’ agreement last September.
USD-JPY Gaps Down: The yen strengthened to as high as 153.3 against the dollar at one point in the Asian session on Monday before paring some gains. This marked a sharp reversal from the 159+ level at which the yen traded amid the Bank of Japan’s rate decision on Friday. At the December rate-setting meeting, the central bank decided to keep its main policy rate — the uncollateralized overnight call rate — unchanged at 0.75%, and BoJ Governor Kazuo Ueda’s commentary was largely perceived as dovish.
On Monday, the yen gapped up at 155 against the dollar and fell further to touch the intraday low at a little after 11 a.m. ET. The rally in the Japanese unit has moderated and at last check, it traded at 153.82.
Source: TradingView
Why the US Wants Firmer Yen: According to Saxo Bank’s Global Head of Macro Strategy, John Hardy, the U.S.’s interest in stabilizing and even supporting the yen is partly due to the U.S.-Japan trade deal that requires Japan to invest hundreds of billions of U.S. dollars into the U.S. economy. “In any case, this looks and feels for real, and at minimum, a very firm floor has been placed under the JPY now, and it could lead to a significant and sharp repricing of the currency higher,” the strategist said.
The yen also benefited from the dollar’s weakness seen since last week, as U.S. President Donald Trump’s rhetoric over Greenland annexation and against Europe set in motion a “sell America” theme.
Source: TradingView
What Are Odds Of Intervention? A modestly stronger yen will temper imported inflation and also make U.S. exports competitive. Strategists see a yen intervention as highly likely. Evercore ISI analysts said failure to deliver on highly anticipated interventions could result in a sharp disorderly reversal in the yen and undesired dollar strength, the Wall Street Journal reported.
“Currency interventions could have a relatively persistent impact on the yen as market rates have moved out of line with fundamentals as reflected by rate differentials,” the firm said. “However, this will need to be sustained by underlying policy shifts, including efforts to restore confidence in fiscal policy.”
According to Jefferies economists, the yen recovery has further legs as the BoJ raises rates in the future, even as the Fed is widely expected to cut rates.
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