The yen hit a six-year low against the dollar on Tuesday, as the hawkish tone of the US Federal Reserve and its determination to curb inflation convinced investors that Japan’s currency may have further to fall.
The currency fell to ¥121 against the greenback, its lowest point since February 2016, completing a near 5 per cent decline so far in 2022.
Shusuke Yamada, head of Japan foreign exchange and rates strategy at Bank of America, said the bank’s latest forecast put the yen at ¥123 to the dollar by September.
Gaps in global monetary policy are behind the move. Fed chair Jay Powell signalled this week that the US central bank could move more aggressively to raise interest rates in a bid to contain surging prices, while the Bank of Japan governor Haruhiko Kuroda maintains a more cautious stance.
At the same time, surging crude oil prices have been weighing on Japan’s current account, with the country in January recording its widest trade deficit in eight years.
The yen’s weakness contrasts with its traditional role as a haven in times of geopolitical stress.
The Japanese currency weathered a sell-off in global stock markets at the start of the year, and showed little reaction to a further dip in equities during the early stages of Russia’s invasion of Ukraine late last month. More recently, a recovery in equity markets has helped drive the yen lower, according to Derek Halpenny, head of research for global markets at MUFG.
“It’s the number one question we’re getting from clients at the moment: how come the yen is not reflecting . . . what’s happening in Ukraine?” he said. “Its reliability as a safe haven is definitely being questioned.”
The global surge in inflation is partly responsible, Halpenny said, as that has made central banks like the Fed determined to push ahead with their rate rises even if the fallout from the war in Ukraine threatens growth or triggers a stock market downturn.
But Kuroda said that a softer yen was positive for the Japanese economy — despite increasing pressure from Japanese media on soaring commodity, food and energy prices.
The slide in the yen was accompanied on Tuesday by a 1.3 per cent rise in the broad Topix index of Japanese equities, driven by exporters that benefit from a weaker currency.
Analysts said the dollar’s move above ¥120 signalled that the yen had now resumed its status as a so-called funding currency that investors sell in search of higher-yielding assets elsewhere.
Benjamin Shatil, an FX strategist at JPMorgan, said the strategy would seem less risky now that the hawkish direction of the Fed was clear and the BoJ was not immediately considering raising rates.
“There is a definite shift in institutional investors’ perception of the yen,” said Shatil. “There is a broad recognition now that yen weakness probably has further to go.”
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Source: Financial Times