The U.S. dollar surged to a 38-year peak against the yen on Monday, driven by a sharp rise in long-term Treasury yields. This significant movement in the currency market has heightened expectations of potential intervention from Japanese authorities to support the yen.
The yen’s decline was further exacerbated by data indicating Japan’s economy contracted more than initially reported in the first quarter. Meanwhile, the euro strengthened following a notable, yet slightly less than expected, performance by the French far-right in the first round of parliamentary elections.
By Monday afternoon, the dollar had climbed to 161.72 yen, its highest level since 1986, and settled at 161.48 yen, marking a 12% decline for the yen this year.
“We’re nearing what could be considered a one-way market with the dollar gaining in 12 of the last 15 days and five of the last six weeks,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. “Market participants are aware of the thin ice regarding intervention. They understand the yen’s weakness is tied to rising Treasury yields and Japan’s slower pace in raising rates. Even if Japan intervenes, the market might see it as an opportunity to buy dollars.”
Economic data showing weaker-than-expected growth added to the uncertainty surrounding the Bank of Japan’s (BoJ) next interest rate moves. The BoJ, meeting in late July, has hinted at potential rate hikes, which could help narrow the significant gap between Japanese and U.S. rates that has pressured the yen this year.
Additional data on Monday revealed a decline in business sentiment within Japan’s service sector for June, counterbalancing an increase in factory confidence. The yen’s fall pushed the euro to a 32-year high of 173.68 yen.
The euro also rose against the dollar, gaining 0.2% to $1.0736.
Easing Euro Risks?
Marine Le Pen’s far-right National Rally (RN) party secured a substantial victory in the first round of France’s parliamentary elections, as exit polls indicated. However, the victory margin was smaller than some polls had projected, triggering a rally in stocks and bonds. The euro had previously lost about 1.3% since the RN’s triumph in the European parliamentary elections in early June, prompting President Emmanuel Macron to call for a snap domestic election.
“This is a mitigation of risks. We’re seeing many hedges related to the French election being unwound,” said Simon Harvey, head of FX analysis at Monex Europe in London. Investors have been wary that the RN could gain power through a “cohabitation” with Macron, potentially pushing for a high-spending and eurosceptic agenda.
The rise in the euro briefly caused the dollar to dip against a basket of currencies, though the greenback remained supported after data on Friday showed U.S. inflation cooled in May, reinforcing expectations that the Federal Reserve will start cutting interest rates later this year. The dollar index was last up 0.1% at 105.84.
Against the dollar, sterling remained flat at $1.2643, while the Australian dollar fell 0.2% to $0.6654.
The dollar briefly slipped following data showing a U.S. manufacturing index fell to 48.5 in June, below the forecast of 49.1. U.S. construction spending for May also came in weaker than expected, declining by 0.1% against expectations for a 0.2% rise.
Market pricing now indicates a 63% probability of a Fed rate cut in September, up from 55% a month ago, according to the CME FedWatch tool.
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