Few think that another G7 central bank would have the courage to intervene directly, as Japan did on Thursday. But they say markets should prepare for more verbal interventions and more aggressive rate hikes as policymakers try to hold back the US currency’s gains.
The dollar is up 16% against a basket of other major currencies this year, en route to its biggest annual gain since at least the 1970s.
“There is an incentive for central banks to act faster. They are realizing that it is better to bring interest rate hikes forward and avoid further currency depreciation,” said Ugo Lancioni, head of global currency at fund manager Neuberger Berman. Lancioni, who is long in the dollar, added that some in Europe want a stronger currency, meaning this move by the BOJ is not unwelcome.
The G7 group of rich countries, which also includes the United States and Japan, has long agreed that markets determine exchange rates. But Japanese policymakers have said this gives Tokyo room to counteract sharp moves.
Japanese Finance Minister Shunichi Suzuki said Japan had good communication with the United States, but declined to say whether Washington had agreed to Tokyo’s first intervention in support of the yen since 1998.
The dollar’s appreciation follows aggressive Federal Reserve rate hikes, recession fears and geopolitical uncertainty following Russia’s invasion of Ukraine.
The magnitude and speed of the dollar’s rise – the latter probably being more important to policy makers – is astonishing. The yen, whose central bank is sticking to an ultra-less policy even as others raise interest rates, is the biggest loser.
The dollar is up 23% against the yen this year, the largest gain in at least 27 years, and nearly 10% since early August.
Chart: Yen sees historic decline
Against the Swedish krona, the dollar rose 22%; the pound sterling lost 17% to a 37-year low and the euro 14%.
Chart: King dollar reigns
Weaker currencies, which could fuel imported inflation, are bad news for policymakers trying to contain price pressures.
The Fed accelerated the global rate hike cycle with some aggressive hikes starting in May, luring more money into the United States.
But other central banks, including the European Central Bank, are catching up with more aggressive rate hikes, even as an energy crisis threatens to plunge economies into recession.
Earlier this month, the ECB made its first increase of 75 basis points. The Swiss National Bank pulled its main interest rate out of negative territory on Thursday and the Swedish Riksbank surprised with a huge 1% rise on Tuesday.
“I’d never say never, but the ECB’s job is not to intervene in the forex markets,” said Marchel Alexandrovich, European economist at Saltmarsh Economics, predicting more verbal interventions or aggressive rate hikes.
“The chorus since the summer is that if we have to increase, we are far from done with interest rates.”
Richard Benson, co-chief investment officer at Millennium Global Investments, said that apart from the SNB, which intervenes regularly, another intervention from the central bank is unlikely.
He said the weakness of the yen was noticeable as the currency was about 50% undervalued on a purchasing power parity basis.
Analysts added that the BOJ’s move, which dropped the dollar by 2% on Thursday, is unlikely to work, pointing to a history of interventions that have depleted foreign exchange reserves and, if not supported by policy changes, rarely make a difference.
Mark Dowding, chief investment officer of BlueBay Asset Management, said his fund had closed its long position in the yen, making 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 a difference – turning the dollar/yen into a “two-way street” by squeezing some of the momentum and speculative trades that have made valuations look extreme.
Chart: Japan steps in to support battered yen