Dollar Eases While Yen Nears Intervention Levels
On Monday, the dollar showed slight weakness but remained close to an eight-week high. Meanwhile, the Japanese yen hovered near the 160 level, prompting verbal warnings from Japanese authorities as markets grew anxious about potential intervention.
Yen's Performance and Government Response
The yen weakened to 159.94 per dollar in early trade, its lowest since April 29, when it reached a 34-year low of 160.245. This led Japanese authorities to spend approximately 9.8 trillion yen to support the currency. The yen later firmed slightly to 159.75 per dollar after Masato Kanda, Japan's top currency diplomat, stated that authorities would take appropriate measures against excessive foreign exchange movements. He added that Japan's inclusion in the U.S. Treasury's monitoring list would not limit their actions.
"We will firmly respond to moves that are too rapid or driven by speculators," Kanda emphasized, though he noted that authorities had no specific levels in mind for intervention.
Impact of BOJ Policies
The yen has faced renewed pressure following the Bank of Japan's (BOJ) decision to delay reducing bond-buying stimulus until its July meeting. The currency is down 1.5% in June. Simon Harvey, head of FX analysis at Monex, remarked, "I don't necessarily think that breaking the psychological level is enough for intervention anymore. Authorities care more about the pace and disorderly moves rather than specific levels."
Interest Rates and Inflation
A summary of opinions from the BOJ's June policy meeting showed that some policymakers called for timely interest rate hikes due to the risk of inflation overshooting expectations. The yen, highly sensitive to U.S. Treasury yields, is down over 10% against the dollar this year, pressured by the significant interest rate gap between Japan and the United States.
Currency Trade Dynamics
Demand for carry trades, where investors borrow yen at low rates to buy higher-yielding currencies, has driven the Australian and New Zealand dollars to 17-year peaks against the yen.
Upcoming Inflation Data
This week's focus will be on the U.S. Personal Consumption Expenditures (PCE) price index, the Federal Reserve's preferred inflation gauge, due on Friday. Economists expect annual growth in the index to slow to 2.6% in May. A soft reading could increase bets on a rate cut as early as September, currently priced at a 70% chance according to the CME FedWatch tool.
Dollar Index and Geopolitical Risks
The dollar index, which measures the greenback against six peers, was last at 105.66, slightly down from the nearly eight-week high of 105.91 touched last week. The focus will also be on geopolitical events, including the first U.S. presidential debate on Thursday and the first round of voting in the French election over the weekend.
"You're going to see a lot of defensive positioning ahead of the French election and U.S. presidential debate," said Monex's Harvey. "Political risk remains a significant source of strength for the dollar, and we expect the dollar index to end the week higher."
Euro and Yuan Performance
The euro, under pressure since French President Emmanuel Macron called a snap election earlier this month, was up 0.2% at $1.07125 but still down 1.2% in June. Meanwhile, the spot yuan traded at 7.2609 per dollar, near its lowest in seven months, weighed by the strong dollar and concerns about China's economic outlook.
Conclusion
For investors, the current dynamics of the forex market highlight the influence of central bank policies, geopolitical risks, and economic data on currency movements. Staying informed about these factors is crucial for navigating the complex landscape and making strategic investment decisions.