Yen Extends lost ground in Asian trade on Tuesday, heading for its second consecutive loss against the dollar, amid fading momentum from Japanese authorities’ interventions. Traders are focusing back on the fundamentals, with the stark interest rate differences between the United States and Japan pressuring the yen. However, ongoing declines in US 10-year treasury yields are somewhat stemming the yen’s losses.
Yen’s Losses and Intervention Momentum
The USD/JPY pair rose 0.5% to 154.59 yen, with a session-low at 153.83 yen. The yen’s 0.6% loss against the dollar on Monday marked its first decline in four days, pulling away from the three-week high of 151.86 yen per dollar. The recent drop in the yen’s value can be attributed to profit-taking and the fading intervention momentum from the Bank of Japan (BOJ), which stopped supporting the local currency despite official holidays in Japan and the UK.
Interest Rate Differences and the Yen
The significant interest rate gap between the United States and Japan, currently at 540 basis points in favor of the US, is a key factor pressuring the yen. This gap is expected to continue offering support for the dollar, especially as the Bank of Japan maintains its low interest rate environment while the Federal Reserve prepares to ease policies.
US Treasury Yields and the Dollar
US 10-year treasury yields fell by 0.1% on Tuesday, on track for the fifth consecutive loss, hovering near three-week lows at 4.469%. This decline has contributed to the dollar’s recent softness, following weaker-than-expected US payrolls data last week. The reduced pressure on the dollar has somewhat slowed the yen’s decline, but the interest rate gap remains a significant driver.
Yen’s Performance and Intervention Strategy
Last week, the yen rose over 3.5% against the dollar, its largest weekly profit since November 2022, following intervention by Japanese authorities. The Bank of Japan’s intervention strategy, which included purchasing nearly $60 billion worth of yen, helped to stabilize the currency. However, with the BOJ stepping back from active intervention, the yen’s recent gains are starting to fade.
Japanese Authorities’ Role in Forex Market
Traders believe that Japanese authorities intervened for at least two days last week to boost the yen, with a focus on low-liquidity days to maximize the impact. This intervention strategy, reported by The Wall Street Journal, indicated that upcoming public holidays in Japan and the UK could become windows for further aggressive interventions. However, Japanese authorities have curtailed their intervention, leaving the forex market to react to broader economic trends.
Current US-Japan Interest Rate Gap
The US-Japan interest rate gap remains a crucial factor in determining the yen’s performance. Although the gap is expected to shrink as the Federal Reserve prepares to ease policies, the current difference in interest rates continues to favor the dollar. This dynamic is likely to play a role in the yen’s trajectory in the coming weeks.
US 10-Year Treasury Yields
The ongoing decline in US 10-year treasury yields is somewhat offsetting the pressure on the yen. The lower yields follow weak US payrolls data, which has boosted the odds of multiple Fed rate cuts this year. The influence of these treasury yields on the forex market is a significant factor in understanding the yen’s recent behavior.
Conclusion
The yen’s extended losses against the dollar are influenced by fading intervention momentum from Japanese authorities, stark interest rate differences between the US and Japan, and broader market trends. The decline in US 10-year treasury yields is providing some relief to the yen, but the pressure from the interest rate gap remains significant. As the forex market adjusts to these factors, the outlook for the yen will depend on the Federal Reserve’s policy direction and the Bank of Japan’s role in supporting the local currency.
FAQs
Q1: Why did the yen lose ground despite recent interventions by Japanese authorities? A1: The yen lost ground as the momentum from Japanese authorities’ interventions faded. The Bank of Japan stopped intervening to support the local currency, leading to profit-taking and a focus on the fundamental interest rate differences between the US and Japan.
Q2: How does the US-Japan interest rate gap impact the yen? A2: The significant interest rate gap between the US and Japan, currently at 540 basis points in favor of the US, pressures the Yen Extends. This gap supports the dollar and contributes to the yen’s decline.
Q3: What was the Bank of Japan’s intervention strategy last week? A3: The Bank of Japan’s intervention strategy involved purchasing nearly $60 billion worth of yen to support the local currency. This strategy focused on low-liquidity days to maximize the impact of interventions.
Q4: What is the impact of US 10-year treasury yields on the yen’s performance? A4: The ongoing decline in US 10-year treasury yields is helping to stem the yen’s losses. The lower yields, following weak US payrolls data, have reduced pressure on the dollar, providing some relief to the Yen Extends.
Q5: How are geopolitical factors influencing the yen? A5: Geopolitical factors, such as ongoing tensions in the Middle East and official holidays in Japan and the UK, can affect the forex market and contribute to the Yen Extends performance. These factors may influence the Bank of Japan’s intervention strategy and the broader direction of the yen.