By Ray Wee
SINGAPORE (Reuters) – The yen approached its lowest level in 38 years on Thursday and struggled at 160 yen to the dollar, keeping markets on alert for any signs of Japanese authorities intervening to support the currency.
In the broader market, the dollar trimmed some of its gains made in the previous session as US Treasury bond yields fell slightly, although the US currency remained near the highest level in eight weeks against a basket of currencies.
The yen rose 0.3 percent to 160.33 yen to the dollar in the Asian session, recovering some of its losses after falling to a low of 160.88 yen on Wednesday, its weakest level since 1986.
The Japanese currency fell about 2% over the month and 12% over the year against the resilient dollar, as it continued to come under heavy pressure from the stark interest rate differentials between the United States and Japan, which have kept the yen attractive as a funding currency for carry trades.
In a carry trade, an investor borrows in a currency with low interest rates and invests the proceeds in higher-yielding assets.
However, the recent decline in the value of the yen beyond the key level of 160 yen per dollar has traders concerned about possible intervention from Tokyo, after the authorities spent 9.79 trillion yen ($60.94 billion) at the end of April and early May to push the yen higher by 5%. From the Japanese yen exchange rate. 34-year low of 160.245.
Analysts said that although the risks of intervention are increasing, Japanese authorities may wait for the release of the US personal consumption expenditures (PCE) price index on Friday before entering the market.
“The level of the exchange rate and the pace of depreciation are important for the Ministry of Finance to consider intervention in foreign exchange markets,” said Boris Kovacevic, global strategist at Convera.
“However, weak volatility in options markets suggests that the recent rally has not met all the criteria the Treasury is looking for.
“Decision makers can wait until Friday’s personal consumption expenditures report, which is expected to show continued decline in US inflation, before making a final decision before the weekend.”
Dollar strength
The pound sterling moved away from the lowest level in more than a month at $1.2616, which it recorded in the previous session, and rose 0.13 percent to $1.2638, while the euro advanced 0.11 percent to $1.0693.
However, the single currency was on track to lose nearly 1.4% during the month, weighed down by political turmoil in the euro zone in the run-up to early French elections scheduled to begin this weekend.
The index fell 0.1% to 105.92, a level not far from the highest level in nearly two months of 106.13 recorded in the previous session, against the backdrop of rising US Treasury yields.
“I think it’s just a combination of things,” Ray Attrill, head of FX strategy at National Australia Bank (OTC:), said of the rise in US yields.
“A few people have mentioned when (Japan) intervened in April and May, there was some suggestion that if the Bank of Japan were to have to dump Treasuries to fund the intervention, that might have an impact.
“But I think there may be a little bit of a…lagged effect – yields were much higher after the CPI, and I think for once, that actually had a little bit of a contagion effect on bond markets elsewhere.”
The upward surprise in Australian inflation on Wednesday caught traders by surprise and prompted markets to raise the chances of another rate hike this year, which in turn pushed up domestic yields.
The Australian dollar rose 0.23 percent to US$0.6663, drawing some support from Wednesday’s inflation shock, while the New Zealand dollar rose 0.07 percent to US$0.6088.
Currency movements outside the yen have been largely subdued for much of the week, as traders await Friday’s US core personal consumption expenditures (PCE) data – the Federal Reserve’s preferred gauge of inflation, for further clues on US interest rate expectations.
Wednesday was the last day investors could trade currencies this quarter, as spot foreign exchange settlement takes two business days.
However, US stock trading moved to a shorter settlement cycle last month, known as T+1.
($1 = 160.6500 yen)