Yen dives as Japan follows Swiss in currency war

LONDON: The yen fell sharply on Thursday as Japan intervened to curb the currency's strength to support its export-led economy, a day after Switzerland's central bank unexpectedly cut interest rates to cap a soaring Swiss franc.

The euro also rose more than 3 percent against the yen to 114.07 yen and, reflecting anxiety about more Swiss action, rose 0.5 percent against the Swiss franc to 1.1078 francs, the other safe-haven currency bought during the latest bout of financial stress.

But analysts said the Japanese authorities' intervention and easing of monetary policy were unlikely to have a lasting impact, given investors' desire to buy safe-haven currencies like the franc and yen on growing worries about global growth, the euro zone debt crisis and expectations of easier US policy.

London traders cited steady yen selling by Japanese authorities in the European session, which pushed the dollar to 80.20 yen, up 4 percent on the day. The dollar's initial spike against the yen started from around 77.15 yen in Asia.

The action by both the Swiss National Bank and the Bank of Japan has caught many in the forex market off-guard and analysts said both could ramp up their intervention tactics in a renewed fight to keep their currencies in check.

"It seems a fresh chapter is opening up in the currency wars, with both Japanese and Swiss officials trying to draw lines in the sand regarding the strength in their currencies they are prepared to tolerate," said Chris Turner, chief currency strategist at ING in a note.

"This is going to be a long and drawn-out campaign, since for Japan the Fed is more likely to cut than hike interest rates and thus the dollar remains pressured, and for the Swiss there seems no resolution to the (euro zone) debt crisis."

Earlier this week, the dollar hit a four-month low of 76.29 yen, close to its record trough of 76.25 yen hit in March after the earthquake. That strengthening worried Japanese exporters.

Finance Minister Yoshihiko Noda confirmed Tokyo had intervened, adding that Japan had acted alone and was communicating with other countries on the move.

Noda did not provide details, but currency market sources said the Bank of Japan was intervening repeatedly to push down the yen. Recent yen gains have sparked fears that the strong currency could weigh on Japan's economic recovery.

Traders estimated the size of intervention so far at more than 1 trillion yen, and some players speculated that Japan's action could end up rivalling the 2.1 trillion yen in intervention it conducted on Sept. 15, 2010 -- the biggest one-day yen-selling intervention ever.

The BoJ conducts intervention on behalf of the Ministry of Finance, which is in charge of currency policy.

Analysts said the intervention could slow the yen's advance, but was unlikely to change its upward trend.

"The Bank of Japan likes to be unpredictable so it is unlikely that this latest bout of intervention will be a one-off one," said Steve Steve Barrow, head of G10 currency research at Standard Bank. "I would expect dollar/yen to stabilise around 80 yen."

BoJ BOOSTS ASSET BUYING

In a policy decision reached a day earlier than initially planned, the BOJ boosted the size of its asset-buying programme to 15 trillion yen from 10 trillion yen, and topped up by 5 trillion yen a 30 trillion yen programme for offering fixed-rate fund injections into the money market.

That followed the Swiss National Bank's decision on Wednesday to announce a shock cut in interest rates. The SNB also threatened more action to cap a soaring Swiss franc.

Analysts said the size of the asset increases by the BOJ was in line with market expectations. While some market players lauded the BOJ for easing monetary policy in coordination with the government's currency intervention, many said it was unlikely to lead to a weakening trend in the yen.

"The combination of monetary easing and intervention has initially increased the yen-weakening impact, but the steps alone are unlikely to be enough to derail the yen-strengthening trend," said Lee Hardman, currency strategist at Bank of Tokyo Mitsubishi.

The yen slid broadly and traders said a variety of market players sold into the greenback's rally, including Asian central banks, Japanese exporters and Japanese retail investors.

Japan's intervention was its first since March 18 when the BOJ and other major central banks jointly intervened after the yen surged to a record high versus the greenback.

Later on Thursday, the Bank of England and the European Central Bank will announce rate decisions and both are widely expected to keep interest rates unchanged. The ECB may signal its intention to take a pause in its interest rate tightening cycle given an economic slowdown and debt market turmoil.

Copyright Reuters, 2011