Bridget Riley and Stefano Rebaudo
TOKYO (Reuters) – The yen fell against the dollar on Tuesday, giving up some of its sharp gains the previous day sparked by suspected intervention by Japanese authorities.
The currency fell 0.40% to 157.00 per dollar but eased to a 34-year low of 160.245 hit on Monday as traders said Tokyo’s yen-buying intervention led to an impressive rebound of nearly six yen.
Japanese authorities have not confirmed they have reached the foreign exchange market to support the yen, but markets remain on high alert for intervention ahead of the Federal Reserve’s monetary policy review this week.
Official data showing whether the interference actually took place will not be available until the end of May.
While some market players have focused on the 160 yen per dollar level as a possible trigger for intervention, analysts believe Japanese authorities may not be targeting specific levels.
The Japanese currency remains lower than it was before the Bank of Japan’s (BOJ) policy announcement last week. It also suffered its biggest monthly decline since January.
Investors expect Japanese bond yields to remain low for an extended period. In contrast, US rates are still relatively high and provide plenty of leeway for yen bears.
“Facing this (rate divergence) in FX interventions usually doesn’t end well,” said Garvey Padraic, ING’s regional head of research for the Americas.
“The most obvious solution to this problem is to raise rates in Japan. If they don’t, something will have to give. And the stronger the resistance, the stronger the subsequent reaction,” he added.
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The Fed begins its two-day monetary policy meeting on Tuesday, where it is expected to keep rates at 5.25%-5.5%, with US inflation expected to remain resilient.
It is also expected to be a hawkish signal, meaning higher sales of the yen are likely, said Carol Kong, currency strategist at the Commonwealth Bank of Australia (OTC:).
“The implication is that the Treasury will likely have to intervene more than once to slow the economy.”
DIFFERENT ECONOMIC PERSPECTIVES
While the timing of any possible BOJ rate hike remains unclear, traders continue to back off bets on the Fed cutting rates this year amid hotter-than-expected U.S. economic data and resilient inflation readings.
According to CME Group’s (NASDAQ:) FedWatch tool, the September rate cut looked like a threat, down just 44%.
The dollar rose 0.16% to 105.69 against a basket of currencies ahead of the Fed meeting, after falling 0.25% in the previous session.
“Fresh US data has prompted our US economist to move up his forecast for the start of the Fed’s easing cycle to 2025 from December 2024,” said Thierry Wiseman, global FX and rates strategist at Macquarie.
“We do not rule out that the next change could be a hike, which would trigger a new wave of broad-based strength in the US dollar.”
Other major central banks, such as the European Central Bank (ECB) and the Bank of England (BoE), could start cutting rates in the near future, even if the policy path becomes more uncertain following recent events.
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Inflation in the euro zone is returning to 2%, but the process will inevitably be uneven and geopolitical tensions pose the risk of higher prices, ECB Vice President Luis de Guindos said late Monday.
Markets may get more information about the timing of the ECB’s rate easing cycle from this week’s European inflation data, due later on Tuesday. Data for Germany and Spain released on Monday were roughly in line with expectations.
The euro fell 0.17% to $1.0719. Sterling was last traded at $1.2531, down 0.25% on the day.
Meanwhile, Australian retail sales data fell, last down 0.60% to $0.653, as markets further reduced the risk of another rate hike by September.
In China, manufacturing and services activity grew at a slower pace in April.
Offshores fell 0.14% to $7.2523 per dollar. Despite continued support from the central bank, the yuan has depreciated 2% against the dollar this year and is on track for a fourth straight monthly onshore loss.
In cryptocurrencies, Bitcoin was last up 0.70% at $63,357.00.