Yen slides past 163 as oil and US yields revive intervention fears

The Japanese yen hovered near its weakest level in almost four decades on Wednesday, July 22, after falling to 163.24 per US dollar during overnight trading in New York.

The currency remained under pressure at about 163.12 per dollar in Asian trading as higher oil prices and US Treasury yields strengthened the greenback. The renewed decline increased speculation that Tokyo could return to the foreign-exchange market to support the yen.

Japanese Finance Minister Satsuki Katayama said the government remained prepared to take decisive action when necessary. However, previous warnings from officials have done little to reverse the currency’s longer-term decline.

Oil and bond yields strengthen the dollar

The dollar advanced broadly as US strikes against Iran continued for an 11th consecutive night, increasing demand for safe-haven assets and pushing energy prices higher.

Samara Hammoud, a currency strategist at Commonwealth Bank of Australia, said an extended Middle East conflict would probably continue supporting the dollar because of its defensive status and its tendency to rise alongside oil prices.

Brent crude futures reached a six-week high of $92.67 per barrel on Wednesday. Rising energy prices are particularly damaging for Japan, a major fuel importer, because they increase import costs and add to domestic inflationary pressure.

US bond yields also remained elevated. The 30-year Treasury yield climbed to a two-month high of 5.15% on Tuesday, while the benchmark 10-year yield reached 4.64%, its highest level since May. Investors were awaiting Wednesday’s auction of 20-year Treasury bonds for the next indication of demand for US government debt.

Higher Treasury yields generally increase the relative attractiveness of dollar-denominated assets. They also widen the interest-rate gap with Japan, maintaining pressure on the yen despite the Bank of Japan raising its policy rate to 1% in June, its highest level in 31 years.

Tokyo keeps markets guessing over intervention

Japan previously intervened after the dollar rose above 160 yen, spending a record ¥11.7 trillion during operations in April and May. The action initially pushed the exchange rate lower, but its effect has since been erased as the dollar resumed its advance.

Japanese officials have increasingly relied on strategic uncertainty rather than repeated verbal warnings. Analysts believe the authorities are likely to focus on the speed and disorderliness of currency movements, rather than defend a fixed exchange-rate level.

The 163-165 range is nevertheless being closely watched as a possible intervention zone. A rapid rise towards 165 could increase the likelihood of official dollar selling and yen buying, although intervention may be less effective while US yields remain high.

The yen had briefly strengthened after Katayama proposed encouraging the $1.8 trillion Government Pension Investment Fund and other retirement funds to increase their holdings of Japanese assets. The initial boost has faded, returning investors’ attention to the possibility of direct currency-market action.

HSBC analysts led by global foreign-exchange research head Paul Mackel believe another intervention could take place soon. However, they expect any impact to be temporary unless the BOJ raises rates more aggressively, the US Federal Reserve returns to an easing stance, or concerns about Japan’s public finances diminish.

HSBC’s central forecast places the dollar between 160 and 165 yen, with occasional intervention limiting excessive gains but Japan’s negative real interest rates continuing to support the US currency.

Other major currencies retreat

The dollar’s strength extended across the broader currency market. The euro briefly fell below $1.14 before recovering to around $1.1408, while the Australian dollar slipped below 70 US cents.

The New Zealand dollar traded near $0.5825, slightly above its 200-day moving average. Sterling fell to $1.3385 and moved below the same technical measure as investors assessed how Britain’s planned public spending would be financed.

With oil prices and US yields continuing to favour the dollar, intervention could slow speculative pressure against the yen without reversing its underlying trend. Markets will now monitor the pace of further yen weakness, statements from Japanese officials and movements in long-term US borrowing costs.

Source: Reuters