After Japan intervenes, the race to contain the strong dollar has begun

LONDON: Currency investors speculate which central bank will move next in the face of a stronger dollar after the Bank of Japan stepped in to support a weaker yen.

Few believe that another G7 central bank will boldly intervene directly, as Japan did on Thursday. But they say the market needs to intervene more verbally and be prepared for more aggressive rate hikes as policymakers try to stop the U.S. dollar from rising.

The dollar has risen 16% against a basket of other major currencies this year, and is expected to see its biggest annual gain since at least the 1970s.

“Central banks have an incentive to move faster,” said Hugo Lancioni, head of global currencies at fund manager Neuberger Berman. I am aware,” he said. Lancioni, who holds a long dollar position, added that some people want a strong currency in Europe.

The G7 group of developed countries, including the United States and Japan, have reached a longstanding agreement that markets will determine currency rates. But Japanese policymakers say it will give Tokyo more leeway to counter sudden moves.

Japan’s Finance Minister Shunichi Suzuki said Japan has good communication with the United States, but since 1998 there has been no mention of whether Washington agreed with Tokyo’s intervention to support the then-yen. avoided.

The dollar surge follows aggressive Federal Reserve rate hikes, recession fears and geopolitical uncertainty after Russia’s invasion of Ukraine.

The magnitude and speed of the dollar’s appreciation (the latter being arguably more important for policy makers) is striking. The yen, the central bank that has stuck to ultra-accommodative policies despite other central banks raising rates, has suffered the biggest losses.

The dollar is up 23% against the yen this year, its biggest move in at least 27 years, and has risen nearly 10% since early August.

The dollar is up 22% against the Swedish crown. The pound fell 17% to its lowest level in 37 years and the euro fell 14%.

bad news

A weaker currency could lead to higher import inflation, which is bad news for policymakers trying to contain price pressures.

The Fed accelerated the global rate hike cycle with aggressive rate hikes since May, attracting more cash to the US.

But other central banks, including the European Central Bank, have caught up with more aggressive rate hikes, even as the energy crisis risks pushing the economy into recession.

The ECB made its first rate hike of 75 bps earlier this month. The Swiss National Bank lifted key rates out of negative territory on Thursday and Sweden’s Riksbank surprised with his massive 1% rise on Tuesday.

“I would never say never, but the ECB is in no business of intervening in the foreign exchange market,” said Marcel Alexandrovich, a European economist at Saltmarsh Economics. predicted any significant rate hike.

“The chorus since summer is that if you have to hike, you’re not done with interest rates.”

Richard Benson, co-chief investment officer at Millennium Global Investments, said central banks were unlikely to intervene again, except for the SNB, which intervenes regularly.

He said the depreciation of the yen stood out and he calculated that the currency was undervalued by about 50% on a purchasing power parity basis.

Analysts added that the BOJ’s move that sent the dollar down 2% on Thursday is unlikely to work, pointing to a history of interventions that have drained foreign exchange reserves, making little difference if not supported by policy shifts. does not bring about

Mark Dowding, chief investment officer at BlueBay Asset Management, said his fund closed a long yen position and made a small profit. He sees the yen as undervalued, but isn’t ready to buy until monetary policy changes.

Neuberger’s Lancioni said this week’s intervention would turn the dollar/yen into a “two-way trade” by squeezing some of the momentum and speculative trading that makes valuations look extreme.