Written by Tommy Wilkes and Neil Mackenzie
LONDON (Reuters) – The Bank of Japan’s intervention to prop up a reluctant yen has currency investors speculating about the central bank, which could then act in the face of a stronger dollar.
Few believe that another G7 central bank would be bold enough to intervene directly as Japan did on Thursday. But they say markets should prepare for more verbal intervention and further interest rate hikes as policy makers try to thwart a rally in the greenback.
The dollar is up 16% this year against a basket of other major currencies, on track for its biggest annual jump since at least the 1970s.
“There is an incentive for central banks to move faster. They recognize that it is better to raise interest rates and try to avoid further currency depreciation,” said Ugo Lancioni, head of global currency at fund manager Neuberger Berman. Lancioni, who holds a long dollar position, added that some in Europe want a stronger currency, which means that the BOJ’s move is not unwelcome.
The Group of Seven wealthy nations, which includes the United States and Japan, have a longstanding agreement that markets decide currency rates. But Japanese policy makers said that gives Tokyo time to face the sharp moves.
Japanese Finance Minister Shunichi Suzuki said Japan had good contacts with the United States, but declined to say whether Washington had approved Tokyo’s first intervention to support the then-yen since 1998.
The dollar’s rally came on the heels of massive interest rate increases by the Federal Reserve, recession fears and geopolitical uncertainty in the wake of the Russian invasion of Ukraine.
The scale and speed of the dollar’s gains – arguably more important to policy makers – were eye-catching. The yen, whose central bank is sticking to a very loose policy even as others raise interest rates, was the biggest loser.
The dollar is up 23% against the yen this year, its biggest move in at least 27 years, and about 10% since early August.
Against the Swedish crown, the dollar rose by 22%. The pound lost 17 percent to its lowest level in 37 years, and the euro 14 percent.
Weaker currencies, which can fuel imported inflation, are bad news for policy makers trying to contain price pressures.
The Fed has accelerated the global interest rate raising cycle with some aggressive rally from May onwards, drawing more money into the US.
But other central banks, including the European Central Bank, are chasing the sharpest increases even as the energy crisis threatens to push economies into recession.
The European Central Bank made its first 75 basis point hike earlier this month. The Swiss National Bank on Thursday raised its key interest rate from negative territory and on Tuesday surprised Sweden’s Riksbank with a massive 1% jump.
“I wouldn’t say never, but the ECB is not in the business of intervening in the forex markets,” said Marcel Alexandrovich, European economist at Saltmarsh Economics, predicting either more verbal intervention or a rate hike.
“The chorus since the summer is that if we have to raise prices, we’re not close to finishing setting prices.”
Richard Benson, chief investment officer at Millennium Global Investments, said that apart from the SNB, which intervenes regularly, another central bank intervention is unlikely.
He said the yen’s weakness has emerged, and the currency is undervalued by about 50% on a purchasing power parity basis.
Analysts added that the Bank of Japan’s move, which sent the dollar down 2% on Thursday, is unlikely to succeed, noting a history of interventions that drain foreign exchange reserves and, if not backed by policy shifts, rarely make a difference.
Mark Dowding, chief investment officer at BlueBay Asset Management, said his fund closed its long position in yen, posting modest gains. 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 make something of a difference – converting the USD/JPY into “two-way trade” by squeezing some momentum and speculative trades that made valuations look extreme.