NEW YORK: The Japanese yen recovered from a fresh two-decade low on Wednesday after the Bank of Japan stepped into the market again to defend its ultra-low interest-rate policy, drawing a sharp contrast with the United States where the Federal Reserve is on an aggressive tightening path.
Traders said the dollar’s fall against the yen also coincided with a slide in US Treasury yields. After hitting three-year peaks earlier in the session just off the 3% mark, benchmark 10-year yields eased 4 basis points to 2.8744%.
“Everybody was going into Asian trading the last few days to see if the BOJ will actually intervene instead of just saying something,” said Erik Bregar, director, FX & precious metals risk management at Silver Gold Bull in Toronto.
“But we didn’t really get much of that and we just got more doubling down on the BOJ’s yield curve policy.”
The yen bounced earlier, as increased nervousness around verbal intervention and growing speculation around an impending bilateral meeting between US Treasury Secretary Yellen and her Japanese counterpart prompted traders to trim some short bets.
Still, positioning in the derivatives and currency futures suggest the yen weakness has more room to run.
The BOJ again offered to buy unlimited amounts of Japanese government bonds to check the rise in Japanese 10-year yields, which were butting against its 0.25% tolerance ceiling.
In contrast, 10-year Treasury yields had earlier marched to three-year highs while inflation-adjusted bond yields hit positive territory for the first time since March 2020, as hawkish comments by policymakers reinforced expectations of hefty US interest rate hikes.
“The Fed has enormous incentive to get the market to price in faster hikes than they’re willing to,” said Steve Englander, head of global G10 FX research and North America macro strategy, at Standard Chartered Bank in New York.
“That also gives them some optionality. If it turns out that the economy slows in the second half, they can back away from some of the hikes.”
The US dollar reached 129.43 yen for the first time since April 2002 in Asian trading before easing to 127.72 yen, down 0.9%.
“US yields backed off and that gave an excuse for dollar/yen to come off the highs. That gave an excuse for euro/dollar to bounce because that is also yield-sensitive,” said Silver Gold Bull’s Bregar.
Elsewhere, the euro was the other big gainer after media reports that some ECB policymakers were forecasting a first rate hike as early as July. The single currency was last up 0.5% at $1.0845.
The dollar index, which measures the currency against six major peers including the yen, matched Tuesday’s high at 101.03 - a level not seen since March 2020 - before easing to 100.33, down 0.6% on the day.
An index of currency market volatility firmed above 8% but still well below 2022 highs of 10% hit in March.
The offshore Chinese currency was the other big loser with the unit declining 0.5% against the greenback to 6.448 yuan per dollar.