The yen fell to its lowest level against the US dollar since August 1998 on Tuesday, as hedge funds in Europe and the US resumed bets on a continuation of the Bank of Japan’s ultra-loose monetary policy.
The Japanese currency fell as much as 1.7 percent to a low of ¥142.97 against the dollar in a sharp selloff that began late in the day in Tokyo and accelerated into the New York trading session.
The BoJ has bucked the tightening trend from global central banks, maintaining a program that keeps long-term borrowing costs extremely low even as yields in other markets rise. The widening gap has severely damaged the appeal of holding the yen relative to other currencies.
The yen selling gained momentum on Tuesday after a key survey showed that activity in the US services sector picked up unexpectedly in August. The data triggered a further rise in US and European bond yields as traders bet the Federal Reserve would continue its program of large rate hikes this month to tame inflation.
A group of Wall Street banks have also said they expect the European Central Bank to hike interest rates this week by the highest rate since 1999, which could put even more pressure on the Japanese currency.
Unlike its counterparts, the BoJ still seeks to rein in long-term borrowing costs through a mechanism known as “yield curve control,” under which it has committed to buying an unlimited amount of bonds to match the 10-year Treasury bond to retain return from an increase above 0.25 percent. By comparison, the 10-year Treasury yield traded at 3.35 percent on Tuesday. Funds are often shifted to countries whose debt offers higher yields.
Traders said leveraged funds, which had previously bet heavily on the yen’s decline and contributed to its long descent since March, began trimming those positions during August amid fears that rising recessionary risk would prompt central banks to turn around would cause more dovish.
However, at last month’s Jackson Hole meeting, the Fed signaled that the US interest rate cycle was not over, and this appears to have reinvigorated the flow of speculative money into the “short yen” bet.
JPMorgan analyst Benjamin Shatil said there is now a vacuum in terms of trade barriers for the yen. “We’re not ruling out an eventual extension of the yen towards the 1998 high of around 147, especially now that the market is comfortable with the idea that 140 isn’t a line in the sand,” he said.
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Earlier Tuesday, Japan’s Finance Minister Shunichi Suzuki said the yen’s sharp moves were unwelcome and that he was watching the slide with “a great sense of urgency.” The comments echo his comments from last week, which has yet to convince the market that the Japanese authorities are ready for more than verbal intervention.
In a note to clients entitled “Staring into the abyss,” Joey Chew, Senior Asia FX Strategist at HSBC, highlighted the yen’s increasingly unusual relationship with risk indicators. The Japanese currency, Chew said, is now negatively correlated with the Vix index, a key measure of expected volatility in U.S. stocks, meaning it weakens when stock market volatility rises.
But the phenomenon could prove to be temporary. “As higher terminal interest rates from major central banks become more fully priced in by the market, the yen’s negative correlation with risk sentiment should normalize,” Chew wrote.