The yen fell to its lowest level since 1986 against the dollar on Wednesday, putting currency markets on alert for signs of intervention by Japanese authorities to revive the beleaguered currency.
The U.S. dollar was trading at 160.39 yen, a level last seen in December 1986, as the interest rate gap between the two countries continued to hammer the Japanese currency.
Analysts said traders were testing the resolve of Japan’s Finance Ministry and Central Bank, which spent $62 billion in late April and early May to prop up the currency when it fell beyond the 160 yen.
“Unless the underlying dynamics change with the yield differential, it continues to be punished,” said Joe Tuckey, head of FX analysis at broker Argentex.
So-called carry trade strategies, in which investors borrow a lower-yielding currency to invest in a higher-yielding currency, have become popular as some countries have increased borrowing costs in recent years.
Although Japan has raised interest rates this year to a range of zero to 0.1%, US rates of 5.25%-5.5% mean investors are flocking to higher yields high levels of dollar assets, causing the currency to rise against the yen.
Top currency diplomat Masato Kanda said Monday that Japan is always ready to act against excessive market movements, but traders ignored the warning after the latest intervention did little to stem the selling.
“Maybe a few months ago it would have been listened to by the market more than it is now, because it hasn’t been supported by any change in rates,” Tuckey said.
There is a possibility of a further rate hike by the Bank of Japan in late July, which could help support the yen. But any sustained rally will likely require a Federal Reserve interest rate cut.
The dollar index, which tracks the currency against six peers, rose 0.3% to 105.99, its highest since May 1.
Friday’s PCE inflation report will be key for currency markets. A weaker-than-expected number could prompt traders to increase their bets on Fed rate cuts this year, providing some relief for the yen.
The euro slipped 0.3% to $1.0683 after a European Central Bank policymaker spoke about the possibility of further rate cuts this year, a markedly different stance from that of the Fed’s Michelle Bowman.
ECB Governing Council member Olli Rehn told Bloomberg that two more cuts this year seem “reasonable.” This is in contrast to Fed Governor Bowman, who said he does not expect any US rate cuts this year.
Australian inflation accelerated to a six-month high of 4% in May, which prompted traders to price in a strong possibility of a further rate hike by November and lifted the Australian dollar 0.5% , before it cooled to rise 0.1% to $0.6656.
The pound fell 0.3% to $1.2647 as the dollar strengthened.
The yuan has also been crushed by the dollar’s stubborn strength, with China appearing to signal some tolerance for a cheaper currency, gradually weakening the midpoint of the yuan’s daily trading range against the dollar.
The yuan, which has been trading at the low end of its range for months, fell to a seven-month low on Wednesday at 7.2671 per dollar.
