Just hours before the Bank of Japan's interest rate announcement, Tokyo appears to have intervened in the foreign exchange market once more. During Thursday's New York trading session, the yen surged as much as 3.3% against the US dollar, reaching 157.98, marking its largest single-day gain since December 2023. Spot gold briefly broke through the $4,100 per ounce level during this volatility.
Sources familiar with the matter indicate that Japanese authorities moved to prop up the yen, while US officials conducted a rate check around 2:30 AM Tokyo time. This American involvement amplified the impact of the intervention, likely making traders more cautious. US Treasury Secretary Scott Bessent stated in an interview that he believes the yen is "significantly undervalued" and that "excessive volatility" is detrimental to market health. Japan's top currency official, Atsushi Mimura, remarked on Friday that the country is receiving more than just moral support from the United States. Earlier reports suggested that Japan had intervened and that US authorities had requested quotes for the dollar-yen rate. As of the time of writing, the yen is trading at around 160.56 to the dollar. Over the past twelve months, the yen has fallen about 6% against the greenback, making it the worst-performing currency among the Group of Ten.
The sudden yen spike has sparked intervention speculation. Japan's Finance Minister, Satsuki Katayama, declined to comment on whether intervention occurred, reiterating that authorities are always prepared to respond with a high sense of urgency. The US Treasury Department declined to comment. The yen recently hit its lowest level in roughly 40 years, pressured by rising oil prices, fiscal concerns, and a wide interest rate differential between Japan and the US. Despite the Japanese authorities spending a record 11.73 trillion yen (approximately $73.4 billion) to intervene in the currency market last quarter, the yen has continued to face downward pressure. Based on Japan's Ministry of Finance reserve data, the country may have used foreign exchange securities, including US Treasuries, to fund this intervention. The unprecedented scale of Japan's actions highlights the significant risks it faces and the difficulty of bucking trends in the $9.5 trillion daily global foreign exchange market. Japan intervened in 2022 for the first time since 1998 to support the yen and acted again in 2024 to curb its depreciation against the dollar. The yen's decline began after the COVID-19 pandemic, as global inflation rose and major central banks raised interest rates, while the Bank of Japan maintained negative rates to stimulate its domestic economy.
Focus shifts to the Bank of Japan's rate decision
Amidst this fresh wave of yen volatility, the Bank of Japan is set to announce its interest rate decision on Friday. Markets expect the central bank to keep rates unchanged following a hike last month, which pushed the policy rate to its highest level since 1995. Investors had previously feared the Bank of Japan was lagging in its response to inflation. "Past interventions have often been followed by Bank of Japan rate hikes, the most recent being in mid-2024," said Rory Green, an economist at TS Lombard. He noted that while a move today would still be surprising, this meeting has the potential for a policy adjustment. Strategist Mark Cranfield commented, "This sharp swing in dollar-yen, covering seven full integer points in a single day, is very rare. Traders were caught off guard by the timing of the intervention news. However, only a decisive break below the 155 level will truly boost yen bulls' confidence." Ahead of the Bank of Japan's decision, a team of strategists at Citigroup, led by Daniel Tobon, advised investors to position for further yen weakness via options, arguing that Governor Kazuo Ueda is unlikely to sound more hawkish than markets anticipate. The Federal Reserve held rates steady this week, but traders still bet on a rate hike later this year, keeping the US-Japan yield differential wide and pressuring the yen. "Intervening now might make investors think twice before selling the yen," said Takeru Yamamoto, a trader at Sumitomo Mitsui Trust Bank. "Compared to the more transparent and easily identifiable intervention in April, intervening right before a central bank policy meeting could be a strategy to catch the market off guard and maximize the impact," added Rinto Maruyama, senior FX and rates strategist at SMBC Nikko Securities. He pointed to the sharp rise in long-term bond yields in both Japan and the US as a key factor behind the intervention and rate checks. "The scale of the move strongly suggests Japanese authorities intervened," said Geoffrey Yu, senior strategist at BNY Mellon. "However, the effectiveness of the intervention remains to be seen."
Dollar weakness from intervention pushes gold past $4,100
The Japanese intervention to boost the yen weakened the US dollar, aiding a gold price rebound. On Friday morning, gold briefly surpassed $4,100 per ounce, putting it on track for its first monthly gain since February. The Federal Reserve's decision to hold rates steady this week, despite inflationary pressures from the Middle East conflict, also provided support for the metal. Higher borrowing costs are typically negative for non-yielding assets like gold. The dollar fell nearly 1% against a basket of currencies on Thursday, primarily due to the yen intervention, making dollar-denominated gold cheaper for most buyers. Since the start of the US-Iran conflict over five months ago, gold has fallen more than a fifth, as high energy prices have fueled inflation and increased the likelihood of sustained high interest rates. However, dip-buying in recent weeks has helped gold hold above the $4,000 level and is on track for a monthly gain of over 2%. The Fed's decision to hold rates steady on Wednesday provided a boost, though the 9-3 vote revealed that some policymakers believe a rate hike is ultimately necessary to achieve the 2% inflation target. Fed Chair Kevin Warsh insisted the latest decision was not a sign of slow action, stating, "If inflation remains persistently high over the forecast horizon, rates are likely to be part of the solution, but I wouldn't describe it as a standalone measure." BMO Capital Markets analyst Helen Amos said Warsh's comments "suggest inflation is not a major concern outside of energy prices." She noted that "market anxiety about inflation may have already peaked," and added that the Jackson Hole symposium in late August could be a key catalyst for gold, as the Fed chair often delivers major policy speeches there. The situation in the Middle East remains unclear. This week, the US and Iran engaged in further clashes. Meanwhile, Saudi Arabia is discussing the formation of a multinational coalition to protect shipping security in the Red Sea and surrounding areas. As of the time of writing, spot gold has slipped below $4,090 per ounce, down 0.35% on the day. The Bloomberg Dollar Spot Index is up 0.1%, after falling 0.9% the previous session.
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