Dollar gives up gains after Japan intervenes to strengthen yen


The dollar fell on Thursday, giving up gains fuelled by another large US interest rate rise, after Japan intervened to strengthen the yen for the first time in 24 years.

An index measuring the US currency against six peers was down 0.4 per cent by the early afternoon in London, having surged after the Federal Reserve on Wednesday raised borrowing costs by 0.75 percentage points — its third consecutive increase of such magnitude.

The greenback’s decline came as the yen rose as much as 2.4 per cent to ¥140.72 against the dollar, after Japan’s top currency official said the government had taken “decisive action” to address a “rapid and one-sided” move in the foreign exchange market. Tokyo last bought US dollars to defend the yen in 1998.

The yen’s ascent marked a sharp reversal from a loss of as much as 1.3 per cent earlier in the session after the Bank of Japan said it would hold its main interest rate at negative levels — widening the gulf between its loose monetary policy and the tightening trend demonstrated by other global central banks.

George Saravelos, global head of FX research at Deutsche Bank in London, said it was “highly doubtful” that intervention by the Japanese authorities would succeed in reversing the yen’s weakening trend.

“It is simply not credible for a central bank to be debasing its currency via extreme amounts of QE while authorities pursue a stronger exchange rate at the same time,” said Saravelos.

Deutsche Bank warned that the cost of intervening could become prohibitive very quickly, resulting in a rapid depletion of Japan’s foreign exchange reserves.

“We worry that intervention will just lead to an unnecessary loss of currency reserves and credibility [for the Japanese authorities],” said Saravelos.

The pound and the euro each added 0.2 per cent and 0.3 per cent respectively as the dollar dropped, with sterling’s gains tempered slightly after the Bank of England lifted interest rates by 0.5 percentage points to 2.25 per cent. Markets had been pricing in the probability of the BoE implementing a three-quarter-point increase in line with the Fed.

Luke Bartholomew, senior economist at the Edinburgh-based asset manager Abrdn, said the UK rate rise “actually looks rather small” in light of the larger rate increases by other central banks.

“The Bank of England, therefore, continues to look like something of a laggard compared to international peers, which is likely to keep the pound under selling pressure,” he added.

The BoE also confirmed that it would press ahead with plans to reduce the stock of assets it has amassed during previous quantitative easing programmes, aiming for gilt sales of £80bn over the next 12 months.

Confirmation of so-called “quantitative tightening” added to worries that the supply of gilts will increase substantially as there is considerable uncertainty attached to the ultimate cost of the UK government’s energy support package for households and businesses

Gilt yields across all maturities moved higher with the yield on the benchmark 10-year gilt rising 10 basis points to 3.5 per cent.

Switzerland’s central bank also lifted borrowing costs by 0.75 percentage points on Thursday, taking its benchmark rate to 0.5 per cent. The move, described by analysts at ING as “the end of an era”, marked a shift into positive territory by the SNB for the first time since 2015.

“This rate hike is intended to combat inflation in Switzerland, which reached 3.5 per cent in August, and is, therefore, higher than the SNB’s objective of having inflation between 0 and 2 per cent,” ING said.

“Thanks to a more favourable energy mix, a lower share of energy in consumption and the strength of the Swiss franc, which limits imported inflation, inflation in Switzerland is nevertheless still much lower than in neighbouring countries.”

The Swiss franc slipped as much as 1.8 per cent against the euro.

In equity markets, European and Asian stocks followed Wall Street lower after the US’s S&P 500 closed down 1.7 per cent on Wednesday. The regional Stoxx Europe 600 gauge fell 0.9 per cent, trimming earlier losses. Hong Kong’s Hang Seng closed 1.6 per cent lower, while Japan’s Topix slipped 0.2 per cent. Futures contracts tracking the S&P dipped 0.2 per cent.

Those declines came after the Fed raised its main interest rate to a range of 3 to 3.25 per cent and a closely watched “dot plot” of central bank officials’ predictions pointed to further rate increases and no cuts before the end of this year.

Gloomy remarks from Fed chair Jay Powell also added to selling pressure on Wall Street on Wednesday. “The chances of a soft landing are likely to diminish,” he warned during a press conference, because monetary policy needed to be “more restrictive or restrictive for longer”.

The latest dot plot of Fed officials’ interest rate projections showed the benchmark rate rising to 4.4 per cent by the end of 2022 before peaking at 4.6 per cent next year.

“The Fed does not intend to slow down anytime soon,” said Ray Sharma-Ong, investment director for multi-asset investment solutions at Abrdn. “We expect a Fed monetary policy-induced recession, and that the Fed will only ease after a recession has occurred.”

Tai Hui, a market strategist at JPMorgan Asset Management, said that while the language of the Fed’s official statement was “nearly identical” to the one that accompanied the previous rate rise in July, “aggressive Fed tightening keeps the probability of recession sometime next year elevated”.

Yields on US Treasuries remained elevated after jumping in response to the Fed’s move, with the policy-sensitive two-year yield adding 0.13 percentage points on Thursday to 4.12 per cent — about a 15-year high.

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