Investing.com – The Japanese yen’s aggressive move this week, mainly against the U.S. dollar, has sparked talk of official intervention. While this could be seen as a sign of extreme dollar strength, UBS pointed to the yen’s weakness, saying the dollar offers greater upside potential on a broader scale.
“The past week had important implications for the US,” UBS analysts said in a May 1 note, as the Bank of Japan maintained a dovish tone at its meeting, pushing USDJPY above 160 on Monday, “and boosted by what markets considered currency intervention.”
“What we see as extreme weakness in the JPY has, in some cases, been coupled with excessive strength in the US dollar. We do not agree with this scheme and believe that the US dollar has more upside potential compared to the G10 as a whole, even if it is difficult to call it ‘cheap’,” UBS added.
The bank noted that there is talk of concerted actions in the foreign exchange markets, similar to the Plaza and Louvre agreements of the 1980s.
However, “we find that the context was markedly different and see significant headwinds to a similar round of concerted action to weaken the dollar this time,” the bank said.
“As a starting point, a major change in US attitude will be required, along with a worsening trade deficit that is starting to take on the hue of what was already seen in the budget deficit. This doesn’t exist yet.”
According to UBS, the overall US dollar exchange rate is well below 2022 levels and far from extremes.
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“He still has more to give.”
UBS continues to hold long positions in G10 currencies, the Canadian dollar and the Swiss franc.
Regarding the Swiss franc, “we note that there were some indications that the SNB [Swiss National Bank] may have bought the currency in March, which, if proven correct, would further strengthen our long-standing bearish sentiment on the currency,” UBS added.