Tommy Wilkes and Nell McKenzie
LONDON, September 22 (Reuters) – The Bank of Japan’s intervention to prop up the free-falling yen has currency investors speculating about what the central bank might do next amid a surging dollar.
Few think another G7 central bank will be bold enough to intervene directly, as Japan did on Thursday. But they say markets should brace for more verbal intervention and more aggressive rate hikes as policymakers try to derail the U.S. currency. climbing.
The dollar is up 16% against a basket of major currencies this year, on track for its biggest annual jump since at least the 1970s = USD.
“Central banks have an incentive to move faster. They understand that it is better to lock in rate hikes and try to avoid further currency depreciation,” said Ugo Lancioni, head of global currencies at fund manager Neuberger Berman. Lanzioni, who is long the dollar, added that some in Europe wanted a stronger currency, meaning the BOJ’s move was not unwelcome.
The G7 group of rich nations, which includes the US and Japan, has a long-standing agreement that exchange rates are determined by markets. But Japanese politicians said it gave Tokyo leeway counter sharp moves.
This was stated by the Minister of Finance of Japan, Shunichi Suzuki There was good communication in Japan with the United States, but declined to say whether Washington had agreed Tokyo’s first intervention support the yen since 1998.
The surge in the dollar came after the Federal Reserve aggressively raised interest rates, recession fears and geopolitical uncertainty following Russia’s invasion of Ukraine.
The scale and speed of the dollar’s growth — the latter perhaps more important to policymakers — has been eye-watering. The yen, whose central bank maintains a very loose policy even as others raise rates, has been the biggest loser.
The dollar is up 23% against the yen this year, its biggest move in 27 years, and up nearly 10% since early August JPY=EBS.
In relation to the Swedish krona, the dollar rose by 22%; The pound lost 17% to a 37-year low, while the euro fell 14%.
Weaker currencies, which could fuel imported inflation, are bad news for policymakers trying to contain price pressures.
The Federal Reserve accelerated the global rate hike cycle with some aggressive hikes from May onwards, luring more money into the United States.
But other central banks, including the European Central Bank, are catching up with more aggressive hikes, even as the energy crisis could push the economy into recession.
ECB secured its first 75bps hike earlier this month. The Swiss National Bank lifted its key rate from negative territory on Thursday, while Sweden’s Riksbank surprised with a big 1% jump on Tuesday.
“I would never say never, but the ECB is not intervening in currency markets,” said Marcel Alexandrovich, Europe economist at Saltmarsh Economics, predicting either more verbal intervention or aggressive rate hikes.
“Since the summer, I’ve been singing that if we have to go on a hike then we’re not close to stopping the bet.”
Richard Benson, co-head of investments at Millennium Global Investments, said that apart from the SNB, which regularly intervenes, another central bank intervention was unlikely.
He said the yen’s weakness stood out, calculating that the currency was undervalued by about 50% at purchasing power parity.
Analysts added that the BOJ’s move, which sent the dollar down 2% on Thursday, was unlikely to work, pointing to a history of interventions that deplete foreign reserves andunless it is backed up by policy shifts, it can rarely make a difference.
Mark Dowding, chief investment officer at BlueBay Asset Management, said his fund closed its long yen position with a modest gain. He sees 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 to turn the dollar/yen into a “two-way trade” by squeezing the momentum and speculative trades that have driven valuations to extremes.
Japan is stepping in to support the battered yenhttps://tmsnrt.rs/3UrwbZE
The Royal Dollar reigns supremehttps://tmsnrt.rs/3r0zedG
She sees a historic declinehttps://tmsnrt.rs/3xI8a6Y
(Reporting by Tommy Regory Wilkes, Nell McKenzie and Dara Ranasinghe; Graphics by Mark Jones; Editing by Dara Ranasinghe and Josie Kao)
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