The US dollar climbed to a 40-year high against the Japanese yen on Wednesday as rising US Treasury yields strengthened the currency.
Investors are now awaiting key US employment data, which could support expectations for another Federal Reserve interest rate increase.
Dollar Reaches 162.84 Yen
The dollar rose as high as 162.84 yen before easing slightly to 162.71 yen. It remained approximately 0.1% higher during the session.
The exchange rate has moved well beyond the levels that previously prompted Japanese authorities to intervene in the currency market.
Japan purchased yen several weeks ago in an effort to slow its decline and limit excessive volatility.
Japan May Intervene Again
Chidu Narayanan, head of Asia-Pacific macro strategy at Wells Fargo, said the market may be approaching levels that could trigger another intervention.
He explained that Japan’s Ministry of Finance may need to act to preserve its credibility, even if officials do not have a specific exchange-rate target.
Traders see Friday’s US public holiday as a possible opportunity for Japan to support the yen. Lower market liquidity could increase the effect of any intervention.
Previous Yen Intervention Was Effective
Japan’s top currency official reportedly said that the intervention conducted two months earlier had successfully supported the yen.
The official also said some US authorities had been supportive of Japan’s decision to enter the foreign exchange market.
However, Japan’s Ministry of Finance may currently be more willing to tolerate yen weakness than it was in the past.
Strong Dollar and Lower Oil Prices Affect Japan’s Response
Joey Chew, head of Asia foreign exchange strategy at HSBC, said the dollar’s broad strength may partly explain Japan’s more patient approach.
The dollar has gained against several major global currencies rather than rising only against the yen.
Falling oil prices have also reduced inflationary pressure in Japan. This may give the Bank of Japan less reason to respond urgently to the weaker currency.
Japanese authorities could also be waiting for the upcoming US employment report. A weaker-than-expected result could reduce demand for the dollar and help the yen recover naturally.
Alternatively, officials may allow speculative yen positions to become more extreme before intervening. Such a strategy could increase the eventual market impact.
Rising Treasury Yields Support the Dollar Rally
The dollar strengthened against several other major currencies as US Treasury yields moved higher.
The euro declined approximately 0.14% to $1.1404, while the British pound slipped 0.2% to around $1.324.
Meanwhile, the US dollar index, which measures the currency against a basket of major rivals, held near 101.31.
A selloff in US government bonds pushed the benchmark 10-year Treasury yield as much as nine basis points higher on Tuesday.
Yields continued rising on Wednesday, gaining four basis points to approximately 4.465%. The increase exceeded the gains recorded in eurozone bond yields.
Analysts did not identify a single clear reason for the bond market move. However, portfolio adjustments around the end of the month may have contributed.
US Jobs Data Could Influence Fed Expectations
Investors are preparing for Thursday’s US non-farm payrolls report, which could affect expectations for Federal Reserve policy.
Recent data showed that US job openings reached a two-year high in May. However, weak hiring activity continued to affect consumers’ confidence in the labor market.
Markets now estimate a 67% probability that the Federal Reserve will raise interest rates in September. That compares with an estimated probability of just 20.5% one month earlier, according to the CME FedWatch tool.
Markets Await Comments From Kevin Warsh
Attention will also turn to Federal Reserve Chair Kevin Warsh’s appearance at the European Central Bank Forum on Central Banking in Portugal.
Currency markets will closely monitor his comments for signals about interest rates and the US economic outlook.
However, analysts believe he may avoid offering clear guidance about future monetary policy.
For now, elevated US Treasury yields and expectations of tighter Federal Reserve policy continue to support the dollar, leaving the Japanese yen vulnerable near historic lows.
