Yen rises from one-year low after official escalates intervention warning

Banknotes of Japanese yen and U.S. dollar are seen in this illustration picture taken Sept 23, 2022. REUTERS/Florence Lo/Illustration/File photo

LONDON/SINGAPORE  – The battered yen recovered some ground on Wednesday on threats of intervention from Japanese authorities, and as investors shifted focus to the Federal Reserve’s policy decision later in the day.

The dollar was last down 0.35 percent at 151.2 yen, after more pointed-than-normal remarks from Japan’s top currency diplomat Masato Kanda.

It hit a one-year high on Tuesday as the yen slid after the Bank of Japan redefined its 1 percent limit on 10-year government bond yields as a reference rate rather than a hard cap.

The tweak disappointed many investors who had been expecting a stronger move away from ultra-loose monetary policy.

READ: BOJ relaxes grip on rates as end to yield control looms

It was not enough to close the wide gap in bond yields between Japan and other countries, that has been responsible for the yen’s almost 14 percent drop against the dollar this year.

“The normalization (in policy) is relatively fast for BOJ standards, but slow relative to what we are seeing in the rest of the world,” said Claudio Irigoyen, global head of economics at Bank of America Global Research.

The yen traded weaker than 160 per euro for the first time since 2008 on Tuesday, but recovered slightly to 159.44 on Wednesday.

“The market definitely will try to probe for where the red line is for the Ministry of Finance,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets.

“It’s clear that it’s not at 150 (per dollar) but you don’t want to be out there in front when the Japanese authorities intervene.”

Economists expect the Fed to keep interest rates on hold when it announces its decision at 1800 GMT (2 p.m. ET).

Investors will scrutinize Chair Jerome Powell’s comments for hints about how long rates will stay at the current 5.25 percent to 5.5 percent level and whether there’s a chance of them rising again.

The euro fell 0.17 percent to $1.0558 in the wake of Tuesday’s fall in growth and inflation.

“The data shows the (European Central Bank’s) 450 basis points of interest rate hikes … are working to restrict demand,” said CBA analyst Carol Kong.

The U.S. dollar index, which tracks the greenback against its major peers, rose 0.22% to 106.9.

It has traded sideways since hitting an almost one-year high of 107.34 in early October on the back of a sharp rise U.S. bond yields driven by strong economic growth.

Analysts said a potentially bigger event for bond and currency markets on Wednesday is the U.S. Treasury’s announcement at 1230 GMT (8.30 a.m. ET) for how it intends to fund its wide budget deficit via the bond market.

Sterling was down 0.19 percent at $1.2132 ahead of the Bank of England’s interest rate decision on Thursday.

The Australian dollar edged up 0.1 percent to $0.6342.

Factory activity indicators in China, Japan and South Korea showed activity slowed in October.