The yen languished near 38-year lows on Thursday and was struggling on the weak side of 160 per dollar, keeping markets on alert for any signs of intervention by Japanese authorities to shore up the currency.
In the broader market, the dollar remained ahead and hovered near eight-week highs against a basket of currencies, helped in part by a weaker yen and rising in step with U.S. Treasury yields. .
The yen rose a marginal 0.1% to 160.63 per dollar in the early Asian session, although it remained a fraction of Wednesday’s low of 160.88, its weakest level since 1986.
The Japanese currency has fallen around 2% on the month and 12% on the year against a resilient greenback, as it continues to be hit by sharp interest rate differences between the US and Japan, which has maintained the attractiveness of using the yen as a financing currency for carry trade operations.
In a carry trade, an investor borrows in a currency with low interest rates and invests the profits in higher-yielding assets.
Still, the yen’s latest drop above the key 160-per-dollar level has kept traders on edge about a possible intervention from Tokyo, after authorities spent 9.79 trillion yen ($60.94 billion) in late April and early May to boost the yen 5 percent from its 34-year low of 160.245.
According to analysts, although the risk of intervention has increased, Japanese authorities could be waiting for the publication on Friday of the United States personal consumption expenditure (PCE) price index before entering the market.
“Both the level of the exchange rate and the pace of depreciation are important for the Ministry of Finance (MoF) to consider intervening in currency markets,” said Boris Kovacevic, global macroeconomic strategist at Convera.
“However, the low volatility in the options markets suggests that the recent leg higher has not met all the criteria sought by the MoF.
“Policymakers could wait for Friday’s PCE report which is expected to show continued disinflation in the US before making a final decision before the weekend.”
DOLLAR STRENGTH
The British pound struggled to break the more than one-month low of $1.2616 hit in the previous session and last bought $1.2622, succumbing to a stronger dollar.
The euro, which also fell to its weakest level since early May on Wednesday, was last up 0.01% at $1.0680.
The common currency was on track to lose about 1.5% for the month, weighed down by political turmoil in the euro zone on the eve of French snap elections set to begin this weekend.
For its part, the dollar index hovered around two-month highs and stabilized at 106.05, supported by high US Treasury yields.
The benchmark 10-year yield rose two basis points to 4.3392% on Thursday, while the two-year yield was last at 4.7576%.
“I think it’s a combination of things,” Ray Attrill, head of currency strategy at National Australia Bank, said of the rise in U.S. yields.
“Some people have been mentioning that when (Japan) intervened back in April, May, there was some suggestion that if the Bank of Japan was going to have to be unloading Treasuries to finance the intervention, it might have an impact.
“But I think there is perhaps a bit of a… lag effect of – Aussie yields were much higher after the CPI, and I think for once, that actually had a bit of a contagion impact to bond markets elsewhere.”
An upside surprise in Australian inflation on Wednesday had caught traders off guard and led markets to raise the chances of another interest rate hike this year, which in turn sent domestic yields higher.
That gave the Australian dollar a slight boost in the previous session, although it was short-lived as the Antipodean currency failed to maintain its gains against a stronger dollar.
The Australian dollar fell 0.02% to $0.6646, while the New Zealand dollar fell 0.07% to $0.6079.
(1 $ = 160.6500 yen)
