The yen is sinking and the dollar is strengthening, but this situation cannot go on forever. The Japanese yen weakened to around 161 per dollar, surpassing that level for the first time since 1986, when the Ministry of Finance has appointed Atsushi Mimura as Japan’s top currency diplomat, replacing Masato Kanda. The admission that the policy used so far by the Japanese government has not been as effective as it should have been
The appointment came as the yen’s sharp depreciation has put constant pressure on Japanese authorities to defend their currency, but they have apparently refused to intervene in foreign exchange markets so far, having done so in late April.
Earlier this week, Finance Minister Shunichi Suzuki warned that sudden, unilateral movements in the yen were undesirable and that authorities would take appropriate action if necessary.
The yen lost more than 2% against the dollar in June, extending its year-over-year decline to about 14%, as the Bank of Japan took a more moderate approach to normalizing monetary policy than in what is expected by the markets.
Meanwhile, Japanese retail sales and industrial production data came in stronger than expected in May, while Tokyo inflation accelerated in June. So the yen’s weakness is not that serious, on a macroeconomic level, for Tokyo.
A problem of excessive dollar strength, which in any case cannot continue
The problem is more of a strong USD than a weak Yen. The US dollar has been in high demand lately, climbing close to its highest level of the year. However, this rally is unlikely to be sustained in the coming months, according to UBS.
The Dollar Index hit one of its highs this morning
The strength reflects a combination of factors, including the Federal Reserve keeping rates high for longer, while other major central banks – including the European Central Bank, the Swiss National Bank and the Bank of Canada – have already started cutting, UBS analysts said in a June 27 note.
Since investors often see the U.S. currency as a safe haven, it is likely to have benefited from the political uncertainty surrounding the French legislative elections, with the first round of voting taking place this Sunday. Yesterday evening’s confusing political debate between candidates certainly did not clarify the situation.
The Yen, as we have seen, has been one of the main victims of the dollar’s strength, losing 14% of its value since the beginning of the year. But the Euro didn’t fare very well either, with a loss of 3%.
The euro, which is the main component of the DXY index, also fell more than 3% against the dollar in 2024.
Further upward pressure on the US dollar remains possible in the near term. Trump has certainly won the election debate, and this suggests a shift in US economic policy that should give a further boost to the dollar, but this cannot last forever.
From a bilateral point of view, however, the French elections on Sunday could lead to a further weakening of the Euro against the American currency.
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