The Japanese yen's decline is accelerating, erasing half of the gains sparked by a historic joint intervention from the United States and Japan.
The currency fell as much as 0.8% against the US dollar on Monday, touching 159.06, marking the worst performance among Group of Ten currencies.
After the yen slid to near a 40-year low around 164 against the dollar, Japan and the US launched their first joint yen-buying operation since 1998 earlier this month. The intervention briefly strengthened the yen to around 155, but the rally has since faded.
Tuesday is a public holiday in Japan, and traders are concerned that reduced liquidity could create conditions for another round of intervention. However, the recent intervention seems unlikely to change the yen's weak trajectory, as it faces significant headwinds, including concerns that Japan may increase fiscal spending.
"Japan is about to enter the Obon holiday period, which may limit market participation, and the domestic event calendar is relatively light," wrote Yujiro Goto, a strategist at Nomura, in a research note. "The focus will remain on the intervention stance of Japanese and US authorities, with investors closely monitoring officials' statements."
This reversal highlights the limitations of intervention in altering the overall trend, given that the underlying drivers of the yen's depreciation remain largely unchanged. Despite warnings from both Tokyo and Washington that they are prepared to act again if necessary, the massive interest rate gap with the US, concerns over Japan's fiscal outlook, and geopolitical uncertainties continue to pressure the yen.
"We believe the market's relatively muted response to this intervention reflects the fundamental causes of currency weakness," strategists at Goldman Sachs, including Kamakshya Trivedi, said in a report. "Unless there is a change in the global situation or an unexpected policy shift, depreciatory pressure will re-emerge over time."
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