The yen approached the key level of 150 per dollar on Monday, causing traders to closely monitor the possibility of intervention after the Bank of Japan and Governor Kazuo Ueda indicated that there would be no immediate departure from their ultra-loose monetary policy. The dollar, on the other hand, continued to gain strength in the broader currency market following the Federal Reserve’s unexpectedly hawkish stance, which suggested that U.S. interest rates would need to remain higher for a longer period than initially anticipated.
The yen weakened to its lowest level in over 10 months, reaching 148.49 per dollar and remaining within striking distance of the crucial 150 level. Market observers believe that if the yen were to breach this level, it would likely trigger forex intervention by Japanese authorities, similar to what occurred last year. Currently, the yen is trading at 148.35 per dollar.
Last Friday, the Japanese currency experienced a decline of over 0.5% after the Bank of Japan decided to maintain its ultra-low interest rates and stick to its dovish stance. Governor Ueda emphasized the need for more time to assess data before considering an interest rate hike. Currency strategist Carol Kong from Commonwealth Bank of Australia stated that while the specific level of the yen may not be the primary trigger for intervention, the pace of change is more significant. However, Kong believes that the risk of forex intervention is higher now due to the warnings issued by Japanese officials. Additionally, there is a greater possibility of coordinated intervention following remarks made by U.S. Treasury Secretary Janet Yellen, who indicated her support for a Bank of Japan intervention depending on the situation.
In other currency news, the euro slightly strengthened to $1.0649 after hitting a six-month low of $1.0615 against the stronger dollar on Friday. The euro is on track to record a monthly decline of approximately 1.8%, marking its most significant monthly fall since May. The pound also experienced a slight decline of 0.04% to $1.2240 after falling over 1% last week due to the Bank of England’s decision to pause its rate-hike cycle. This decision came after data revealed a surprising slowdown in Britain’s high inflation rate. The pound is set to record a more than 3% decline in September, marking its worst monthly performance in a year.
Thierry Wizman, Macquarie’s global FX and interest rates strategist, noted that central banks in the UK, the Euro area, and Japan have shifted their stance and are now testing the theory that their slowing economies may lead to a defeat of the inflation impulse. Wizman also highlighted that the U.S. stands apart from the rest of the world, as it has yet to display the same growth weaknesses. The Federal Reserve has signaled its willingness to take risks by continuing to tighten monetary policy.
Despite keeping rates unchanged at the recent policy meeting, Fed officials have warned of further rate hikes in the future. Market expectations now indicate a roughly 21% chance of a 25-basis-point increase at the November meeting. The dollar index, which reached a six-month high on Friday, remained firm at 105.58.
In terms of other currencies, the Australian dollar weakened by 0.19% to $0.6429, while the New Zealand dollar declined by 0.18% to $0.5950 after reaching a three-week high of $0.6001 earlier in the session.
Overall, the currency market is closely monitoring the yen’s movement towards the 150 per dollar level and the potential for intervention by Japanese authorities. The dollar continues to strengthen following the Federal Reserve’s hawkish stance. The euro and pound have both experienced declines, with the pound recording its worst monthly performance in a year. Central banks in the UK, the Euro area, and Japan have shifted their stance due to concerns about their slowing economies. The Federal Reserve has signaled its willingness to continue tightening monetary policy, despite keeping rates unchanged at the recent policy meeting.
