The Japanese yen is on track for its biggest weekly decline in over two months, as intervention warnings fail to deter investors from betting on further weakness in the currency.
The yen is nearing the closely watched level of 165 against the US dollar, after hitting a 40-year low of 163.99 on Thursday. It has fallen about 0.8% this week, marking its worst performance since May — when a record intervention by Japan triggered a yen weakening.
Meanwhile, escalating tensions in the Middle East have heightened concerns over potential energy supply disruptions, boosting expectations of a Federal Reserve rate hike and pushing the dollar higher.
Earlier this week, traders shrugged off warnings from two senior Japanese officials, who stated that authorities were ready to act in the foreign exchange market if necessary. Despite reports that Bank of Japan officials are open to a faster pace of rate hikes than economists generally anticipate, the wide interest rate differential between the US and Japan continues to weigh on the yen.
"Any comments from Japanese officials today about preparing for intervention or a faster BOJ rate hike are likely to be ignored, given the backdrop of surging energy prices, market repricing due to a hawkish Fed, and the yen losing its safe-haven status," said Tony Sycamore, an analyst at IG Australia, who expects the dollar-yen pair to extend its rally toward 165. "Trying to support the yen right now is like standing in front of a bullet train."
The market widely expects the Bank of Japan to keep its policy rate unchanged at next week's meeting. Half of the economists surveyed by Bloomberg News still predict the central bank will wait until December to raise rates, with the government led by Prime Minister Shigeru Ishiba seen as a key obstacle to further action.
This week, Japan's government approved an economic and fiscal policy plan, which has also pressured the yen due to concerns over Ishiba's fiscal approach. Since the plan lacks details on how the government will secure investment goals or fund potential consumption tax cuts and increased defense spending, it has done little to ease concerns among market participants worried about Japan's long-term debt trajectory.
As Iran-backed Houthi rebels claimed an attack on a merchant vessel for the first time in months, Brent crude oil broke above $100 per barrel, while WTI crude neared $92 per barrel. The rising oil prices are prompting traders to factor in the possibility of a rate hike by the Federal Reserve under Chair Kevin Warsh, with markets fully pricing in a 25-basis-point hike by September.
"If WTI rises to $100 per barrel, the dollar-yen pair could climb to around 164.50," said Yuya Yokota, a foreign exchange trader at Mitsubishi UFJ Trust and Banking in New York. "As the yen approaches 164 against the dollar, market participants are closely watching how Japanese authorities will respond."
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