The yen languished near 38-year lows on the weaker side of 160 per dollar on Thursday, keeping traders on alert for any signs of intervention by Japanese authorities to support the currency.
In the broader market, the dollar pared some of its gains from the previous session, helped by a slight decline in U.S. Treasury yields, although it held near eight-week highs against a basket of currencies.
The yen weakened another 0.2% to 160.47 per dollar, after falling to a low of 160.88 on Wednesday, its weakest since 1986.
The Japanese currency is down about 2% this month and 12% for the year against a resilient dollar, as it continues to be hammered by wide interest rate differentials between the U.S. and Japan, which has maintained the appeal of using the yen as a funding currency for carry trades.
In a carry trade, the investor borrows a currency with low interest rates and invests the proceeds in higher-yielding assets.
However, the yen’s latest slide past the key 160 per dollar level has traders nervous about possible intervention from Tokyo, after authorities spent 9.79 trillion yen ($60.94 billion) in late April and early May to push the yen up 5% from a 34-year low of 160.245.
“There appears to be little chance that the Bank of Japan and its allies can support the yen without incurring horrendous costs or an economy-destroying rate hike,” said David Morrison, senior market analyst at Trade Nation.
Analysts said that while the risk of intervention has increased, Japanese authorities may wait for Friday’s release of the U.S. personal consumption expenditure (PCE) price index before entering the market. However, any intervention would likely have a limited effect, they said.
“I don’t think the Japanese authorities can do much and the market has shown that,” Dong Chen, chief Asia strategist and head of Asia research at Pictet Wealth Management, said at an outlook event on Thursday.
“Despite all verbal and real interventions, they have failed to stop the yen’s slide,” Chen said, highlighting the wide interest rate differential. “We continue to expect the yen to be weak.”
DOLLAR STRENGTH
The pound pulled away from a more than one-month low of $1.2616 hit in the previous session and rose 0.22% to $1.2649, while the euro rose 0.18% to $1.0699.
The euro is on track to lose about 1.4% this month, weighed down by political turmoil in the euro zone ahead of a snap election in France starting this weekend.
The dollar index fell 0.15% to 105.89, not far from a nearly two-month high of 106.13 on Wednesday.
“Political turmoil in Europe and the ‘higher for longer’ narrative in the U.S. have increased the dollar’s attractiveness,” said Boris Kovacevic, global macro strategist at Convera.
“For the currency to start giving up some of its gains from one year to the next, we would need to see a continuation of the global disinflation trend and for politics to move away from the spotlight.”
The Swedish krona weakened after the central bank kept its key interest rate at 3.75% on Thursday as expected and said that if the inflation outlook remains unchanged, the policy rate could be cut two or three times in the second half of the year.
The dollar rose 0.2 percent to 10.60 crowns.
Elsewhere, the Australian dollar rose 0.3% to $0.6668, drawing some support from Wednesday’s upside surprise on domestic inflation, which prompted markets to raise chances of another interest rate hike by the Reserve Bank of Australia this year.
The New Zealand dollar rose 0.18% to $0.6094.
Currency movements beyond the yen have been mostly muted for most of the week, as traders await Friday’s U.S. core PCE data — the Federal Reserve’s preferred measure of inflation — for further clues to the outlook for U.S. rates.
Wednesday was the last day investors could trade currencies for the quarter, as spot settlement takes two business days.
Last month, however, U.S. stock trading shifted to a shorter settlement cycle, known as T+1.
(1 dollar = 160.6500 yen)
