The Yen Has Lost Nearly Half of Its Gains After US-Japan Intervention

By the end of the week, the Japanese yen had erased almost half of the strengthening achieved after a joint currency intervention by the US and Japan. This fueled expectations that authorities in both countries may step into the market again.

On August 7 during the day, the exchange rate hovered around 158.40 yen per dollar. On Monday, the Japanese currency had strengthened to 155.23 yen per dollar, whereas prior to the intervention it was trading near its lowest level in roughly 40 years – close to 164 yen.

Thus, part of the currency operation's effect was lost after only a few trading sessions. The joint US-Japan intervention marked the first coordinated operation to purchase yen since 1998.

The retracement to the 158 mark points to the limited capacity of currency interventions without a shift in fundamental conditions. The yen remains under pressure from a significant interest rate differential between the US and Japan, the country's large public debt, and geopolitical uncertainty.

Higher US rates make dollar-denominated assets more attractive for investors and sustain carry trades, where market players borrow cheap yen and put money into higher-yielding assets.

The dollar gained further on August 6, posting its biggest daily advance in two weeks. Demand for the US currency was supported by rising oil prices and fading hopes for a swift de-escalation in the Middle East.

Market participants will now be watching the pace of continued yen weakness. An abrupt move toward the 160-164 yen per dollar area could raise the likelihood of renewed intervention, although Japanese officials do not set a public exchange-rate target.

At the end of July, the US and Japan jointly propped up the yen after its fall to a multi-year trough. For Washington, this marked its first currency intervention in roughly 15 years.

Sources: Bloomberg, Financial Times, The Wall Street Journal