The Japanese Yen has given back a significant portion of the gains it achieved following the rare joint intervention by the US and Japan. Analysts are attributing this reversal to the expectation of continued interest rate hikes by the Federal Reserve, which is set to support the dollar. This suggests that while the intervention provided a short-term boost, fundamental economic factors are reasserting their influence on currency valuations.
Currency strategists believe that the immediate impact of the US-Japan intervention has largely diminished. They indicate that market expectations are now shifting towards the Federal Reserve's monetary policy, specifically another interest-rate hike this year. This outlook is strengthening the dollar and consequently weakening the yen, despite the recent efforts to prop it up.
The intervention saw Japan potentially spend as much as $36.58 billion buying yen. The yen initially surged more than 1% to 155.20 per dollar after the announcement, its strongest since early May, moving away from a 40-year low near 164. However, it was trading around 156.92 shortly after, indicating that the rally was short-lived. The U.S. Treasury also participated by selling euros to buy yen, though the specific amount was not disclosed.
While the coordinated intervention was seen as a historic and significant step, designed to clear out yen shorts and deter carry trades, analysts like Michael Wan from MUFG and Vishnu Varathan from Mizuho noted that a more durable move lower in USD/JPY would require fundamental changes. The effectiveness of such interventions is often limited if underlying economic policies, such as Japan's accommodative monetary stance, remain unchanged. Some analysts, including those from Bank of America, expect the Bank of Japan to raise rates again in October, with a growing possibility of a September move, which could provide more lasting support for the yen.
