The dollar rose against the yen to an almost 11-month high on Monday, keeping traders focused on intervention risks after the Bank of Japan and Governor Kazuo Ueda quashed hopes of any imminent move away from its stark ultra-loose monetary policy. The dollar steadied after last week’s gains in the broader currency market. The Federal Reserve surprised markets by signaling that U.S. rates would need to stay higher for longer than initially expected.
That kept bond yields rising across the world and weighed on the yen, which is seen as a safe-haven currency. In Japan, investors are still focused on a raft of data due this week that could keep the central bank’s policy anchored near zero for much longer than expected. A collapse has hit the Japanese economy in exports as many foreign firms avoid the country because of the coronavirus lockdown. At the same time, domestic property prices have been battered by an oversupply of apartments.
In addition, inflation is running far above the BOJ’s 2% target, and household spending has plunged as consumers rein in their expenditures. That means the BOJ’s reliance on asset sales and negative interest rates to keep consumer prices in check is becoming increasingly unsustainable.
Investors are also looking at the Fed, which is set to meet this week. Analysts expect it to leave its key interest rate unchanged, but the reassessment of the outlook will pressure the central bank to speed up its rate hikes.
That would send the dollar soaring, sending the yen tumbling further, and hurting those U.S. stocks that many retirees rely on as the mainstay of their retirement funds. The S&P 500 companies that make up the index earn about 40% of their revenues outside the United States, meaning a strong dollar could hurt their earnings and stock prices.
But some analysts are downplaying the threat of a stronger dollar. “We have heard plenty of language that echoes the warnings leading up to intervention last year, but it’s difficult to imagine the Ministry of finance taking action this soon,” said Nomura Securities F.X. strategist Yujiro Goto.
The dollar is already trading close to a nine-year high against the yen and has risen about 20 percent against the euro and 13 percent against emerging market currencies since the start of the year. That’s a significant gain in a short time and will likely have ripple effects. “The impact will be felt in various ways, from pushing up the cost of U.S. goods and services for non-residents to making it more expensive for global institutional investors to invest in our markets,” said Annex Wealth Management chief economist Brian Jacobsen. “At a macro level, this will help to depress global demand and slow growth.” The stronger dollar also raises worries about inflation in China, making the yuan cheaper for foreign buyers. That could trigger a reversal in the current global expansion and drag China’s exports lower.