The yen plunged Wednesday after an influential Bank of Japan official damped down expectations of a near-term interest rate hike, easing investor concerns the Japanese currency would surge again and roil global markets.
The yen dropped about 2.5% to a session low of 147.94 per dollar following the comments from BOJ Deputy Governor Shinichi Uchida. The dollar later gained 1.74% to 146.850 yen.
Effect of BOJ's Recent Moves
The BOJ's rate hike last week, coupled with intervention from Tokyo earlier this month, sent investors scurrying away from once-feted carry trades in which traders borrow yen at low rates to invest in higher-yielding assets. The unwinding of carry trades—as well as weak U.S. jobs data on Friday and fears of an artificial intelligence bubble—sent global equities tumbling this week, starting with a 12% crash in Japanese equities on Monday.
U.S. dollar index moves upwards
The U.S. dollar index, which measures the greenback against six major currencies, rose 0.214 percent to 103.2, further away from a seven-month low of 102.15 touched on Monday. The Mexican peso, New Zealand dollar, and the Australian dollar—usual carry trade investment candidates—rallied against the yen in broad-based selling. Another currency used to fund carry trades, like the yen, was the Swiss franc, which fell about 1.18 percent to 0.862 per dollar.
European Currencies React
The euro eased 0.09% to $1.092, staying below an eight-month high of $1.101 touched on Monday when the dollar fell. Sterling dropped a little, down 0.06% at $1.268.
Mixed Performance for Commodity Currencies
The Australian dollar stood at $0.652, down 0.01%, a day after the central bank ruled out the possibility of a cut in interest rates this year, indicating that core inflation is expected to decline only slowly. The Aussie, which had struggled in recent days and hit an eight-month low on Monday amid the global market meltdown, perked up following the comments from the BOJ.
In contrast, the New Zealand dollar rose 0.63% to $0.599 following positive jobs data.
Steep Decline of Yen
The USD/JPY has dropped sharply during the past four weeks. USD/JPY was up 1.8% at ¥146.88 as of ET 08:55 ET, Wednesday, rebounding after the BOJ officials knocked down expectations of further interest rate hikes earlier on Wednesday. Deputy Governor Uchida said the bank would not hike interest rates at times markets are unstable, remarks that followed volatile moves in the Japanese currency.
The yen, however, was still far from 38-year lows struck earlier this year, and the pair plunged sharply over the past four weeks from a high of near ¥162 reached last month.
Yen Carry Trade Dynamics
The weakness of the yen has, to a large extent, been driven by record-low Japanese interest rates, which promote the hugely popular yen carry trade. The trade involves borrowing in yen to buy currencies with better yields. The result is that the yen has emerged as the funding currency of choice for carry trades in U.S. dollars, Mexican pesos, New Zealand dollars, and others.
However, the viability of that trade was called into question when Japanese authorities began to intervene to prop up their beleaguered currency. That intervention began to unravel properly when the BOJ hiked interest rates last week. Japan's overnight rate stands at 0.25% now versus roughly 5.5% for dollar rates. Carry trades are more sensitive to currency moves and rate expectations than the actual level of rates.
Global Market Repercussions
The recent sell-off in cryptocurrency markets adds to the broader rout in markets. Equities have been under heavy selling pressure across the globe, with fears of a possible recession in the United States or disruptions in yen markets at the fore. Bitcoin, the largest cryptocurrency by market capitalization, experienced a "death cross" on its short-term charts—a technical formation that typically heralds bearish momentum.
Market Outlook
With the yen easing to a session low of 147.94 per dollar, investors remained in the process of adjusting strategies in view of how the changing economic landscape has been shaping up. In addition, the unwind of carry trades, spurred by weak US jobs data and fears of the AI bubble, have further created a volatile market environment. Much attention will, therefore, be on future economic data and words from central banks to decide market directions.
In a nutshell, the plunge of the yen and the position that the BOJ has assumed over interest rates have huge implications for financial markets across the world. Facing unwinding carry trades and lingering uncertainties in the economy, investors have to be on their toes and adjust accordingly through the murky market ahead.
