The Bank of Japan’s intervention in support of a plummeting yen is prompting currency investors to speculate on the next central bank that might act in the face of the soaring dollar.
Few people think another G7 central bank would be bold enough to step in directly like Japan did on Thursday. But they say markets should brace for more verbal intervention and more aggressive rate hikes as policymakers try to thwart the US currency’s ascent.
The dollar is up 16% this year against a basket of other major currencies, on track for its biggest annual jump since at least the 1970s.
“There is an incentive for central banks to act more quickly. They realize that it is better to anticipate rate hikes and try to avoid further currency depreciation,” said Ugo Lancioni, head of global currencies at fund manager Neuberger Berman. Lancioni, who is long in the dollar, added that some in Europe want a stronger currency, which means the BOJ’s move is not unwelcome.
The G7 group of wealthy nations, which includes the United States and Japan, has a longstanding agreement that markets decide exchange rates. But Japanese policymakers said it gave Tokyo leeway to counter sudden moves.
Japanese Finance Minister Shunichi Suzuki said Japan had good communication with the United States, but declined to say whether Washington had consented to Tokyo’s first intervention to support the yen since 1998.
The surge in the dollar follows aggressive interest rate hikes by the Federal Reserve, recession fears and geopolitical uncertainty following Russia’s invasion of Ukraine.
The magnitude and speed of the dollar’s gains, the latter arguably more important to policymakers, have been breathtaking. The yen, whose central bank is sticking to an ultra-loose policy even as others hike rates, was the biggest loser.
The dollar is up 23% against the yen this year, its biggest move in at least 27 years, and nearly 10% since early August.
Against the Swedish krona, the dollar is up 22%; the pound fell 17% to its lowest level in 37 years and the euro, 14%.
Weaker currencies, which can fuel imported inflation, are bad news for policymakers trying to contain price pressures.
The Fed accelerated the global rate hike cycle with an aggressive hike from May, drawing more liquidity into the United States.
But other central banks, including the European Central Bank, are catching up with more aggressive hikes, even as an energy crisis risks tipping economies into recession.
The ECB issued its first hike of 75 basis points at the beginning of the month. The Swiss National Bank raised its key rate out of negative territory on Thursday and the Swedish Riksbank surprised Tuesday with a massive 1% jump.
“I would never say never, but the ECB is not in the business of intervening in the currency markets,” said Marchel Alexandrovich, European economist at Saltmarsh Economics, predicting either more verbal interventions or rate hikes. aggressive.
“The refrain since the summer has been that if we have to increase, we are not close to being done with the tariffs.
Richard Benson, co-chief investment officer at Millennium Global Investments, said that outside of the SNB, which regularly intervenes, further central bank intervention was unlikely.
He said the yen’s weakness stood out, calculating the currency was undervalued by about 50% on a purchasing power parity basis.
Analysts added that the BOJ’s move, which sent the dollar down 2% on Thursday, is unlikely to work, pointing to a history of interventions that deplete foreign exchange reserves and, if not backed by changes politics, rarely make a difference.
Mark Dowding, chief investment officer of BlueBay Asset Management, said his fund closed its long position in the yen, making a modest gain. He views the yen as undervalued but is not ready to buy until monetary policy changes.
Neuberger’s Lancioni said this week’s intervention would do something different by turning the dollar/yen into a “two-way trade” by compressing some of the momentum and speculative trading that has driven valuations to extremes.
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