Yen climbs above 161 per dollar as intervention fears escalate

The yen staged its strongest weekly recovery in three months, climbing from a 40-year low of 162.84 to trade above 161 per dollar, as traders braced for possible intervention by Japanese authorities.

The yen rebounded from a 40-year low to trade at 161.25 per dollar Friday, recovering all its weekly losses as a softer US jobs report and rising intervention fears drove a sharp reversal in the currency pair.

"You have to have it on the radar," Karl Steiner, head of analysis at SEB, said of the possibility of intervention. "Historically they have preferred to do it whenever there is lower liquidity."

The dollar index fell 0.5% for the week, its biggest drop since early April, after US job growth slowed sharply in June and payroll gains for the prior two months were revised lower. Markets now price about a 45% chance of a Fed rate hike at the September meeting, according to CME FedWatch data. The euro rose 0.5% to $1.1440, while sterling gained 1.1% to $1.3352.

The yen's recovery has shifted the calculus for carry traders who have used the currency as a funding vehicle, with Goldman Sachs analysts arguing the yen will likely continue to weaken without a change in the fundamental macro backdrop. Japan's Finance Minister Satsuki Katayama said Tokyo remained in regular contact with Washington on foreign exchange issues and stood ready to support the yen.

The move lower in USD/JPY accelerated after the pair touched 162.84 earlier in the week, its weakest level in four decades. The yen's turnaround coincided with a sharp drop in US Treasury yields after the jobs data, narrowing the rate differential that has driven the currency lower. The 2-year US-Japan yield spread narrowed by about 8 basis points Thursday, according to data from the Japan Securities Dealers Association.

Japanese officials have intensified their verbal warnings in recent days. Chief Cabinet Secretary Minoru Kihara said the government was monitoring market movements with a sense of urgency, while Economy Minister Minoru Kiuchi said Tokyo would never convey in advance its preference on how the Bank of Japan should set interest rates. The comments mark a departure from Japan's traditional approach of telegraphing intervention risks, instead indicating a more targeted campaign to squeeze speculators.

Cross-Asset Ripples

The yen's recovery rippled across currency markets. The British pound hovered near its strongest level against the yen since 2007, having scaled a peak of 218.00 yen overnight. The euro bought 185.64 yen, up 0.6% for the week. The Australian dollar traded at $0.6939, while the New Zealand dollar rose 0.08% to $0.5759, heading for a weekly gain of more than 0.9% after the Reserve Bank of New Zealand hiked rates and signaled further tightening.

"While intervention risks remain top-of-mind as a tactical consideration, we have argued that without a change in the fundamental macro backdrop — higher-for-longer US yields, low recession risk, and lingering fiscal concerns in Japan — the yen will likely continue to steadily weaken in the months ahead," analysts at Goldman Sachs said. "This helps place the yen as a top funding candidate over longer horizons."

The last time Japanese authorities intervened in currency markets was in October 2022, when the yen weakened past 151 per dollar. That intervention, totaling about $60 billion over several days, temporarily reversed the yen's decline before it resumed weeks later. With US markets closed Friday for the Independence Day holiday, thin liquidity could provide a window for another intervention, though the trigger level remains uncertain.

This article is for informational purposes only and does not constitute investment advice.