On April 29, 2024, people queued up outside a money changer (left) on a street in central Tokyo to buy and sell Japanese yen against foreign currencies.
Richard A. Brooks | AFP | Getty Images
The yen hovered near three-month lows against the dollar after hitting 153.18 late Wednesday.
In the past, yen weakness has been attributed to the difference between U.S. and Japanese interest rates, as lower rates tend to weigh on the currency, while higher rates push it higher. Japan has had negative interest rates for about eight years, causing its currency to weaken relative to the dollar.
But the spread has narrowed as the Federal Reserve lowered interest rates and the Bank of Japan raised them. So why is the yen depreciating now?
Alvin Tan, head of Asia FX strategy at RBC Capital Markets, said the yen remains “by far the lowest-yielding G10 currency.” G10 refers to the 10 most frequently traded currencies in the world.
Therefore, holding a long position in the yen is costly because it offers much lower interest rates than the counterpart in the currency pair (which may be the euro or the dollar).
“The annualized interest rate on 1-month yen deposits is +0.03%, compared to 4.76% for the U.S. dollar. This is why the yen cannot continue to strengthen despite interest rate cuts by the Federal Reserve (or the European Central Bank). The interest rate differential against the U.S. dollar is of great concern to many investors For me, the yen is still too big to consider holding for the long term.
Homin Lee, senior macro strategist at Swiss private bank Lombard Odier, told CNBC that recent yen fluctuations may also be due to market repricing of former U.S. President Donald Trump’s return to the Oval Office, solid U.S. growth indicators and concerns about the impending The coming Japanese general election.
He added that continued volatile trading in the pair “may be unavoidable in the short term” due to the elections in the United States and Japan.
However, further yen weakness could trigger another intervention by Japanese authorities, Lee said, noting that voters remain dissatisfied with the “extremely cheap yen.”
Royal Bank of Canada’s Tan believes that global risk sentiment needs to weaken significantly for the yen to strengthen, saying, “When global market volatility increases, the yen will benefit because it is a top safe-haven currency.”
Earlier this year, following the yen’s volatility, Hugh Chung, chief investment adviser at wealth and funds platform Endowus, told CNBC that the yen tends to weaken against the dollar during periods of risk aversion, when U.S. yields rise and stocks fall.
U.S. Treasury yields have indeed been rising, while stocks have taken a beating over the past few days, which seemed to trigger a drop of more than 1% in the dollar on Wednesday.
The yen last traded at 152.82 against the dollar.
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