TOKYO -- The dollar turned weaker across the board on Tuesday. The Japanese currency advanced as far as the mid-105 yen level against it. The euro changed hands for over $1.16 at one point, the strongest level for the common currency since August of last year.
Even the British pound, which had softened against the dollar since the beginning of the year due to the looming possibility of a U.K. exit from the European Union, has more or less regained lost ground.
The trade-weighted Nikkei Currency Index shows that the dollar has declined 8% from a peak in January against a basket of 24 peers. The reasons behind the drop-off can be traced back to summer 2014, when the U.S. started drawing investment money. For roughly the next one and a half years, the greenback continued to pick up steam amid an economic recovery, reaching heights not seen since 2002 as speculation grew about interest rate increases.
Then U.S. authorities started to noticeably change their tune. During April's meeting of the Group of 20 financial chiefs, Treasury Secretary Jacob Lew made remarks seen as a warning to Tokyo against intervening in the currency market.
Last Friday, the Treasury Department placed Japan on a new watch list for foreign exchange practices, citing the country's robust current-account surplus.
In December, the Federal Reserve Board hiked interest rates for the first time in nearly a decade, but the body has stood pat since. The growing market view is that this year will see only one U.S. rate hike.
As the image of the U.S. as the only major country raising policy rates weakens, speculative traders and institutional investors alike find themselves pressured to sell the dollar.
The strong dollar has become a hot-button issue in America, especially during a presidential election year and when the Trans-Pacific Partnership faces the ratification process. Additionally, the lofty dollar depressed profitability at export-heavy American companies last year.
A soft dollar also has the effect of propping up emerging economies. Dollar-denominated liabilities in emerging nations total over $3 trillion, data from the Bank for International Settlements shows, and a weaker greenback will consequently alleviate corporate debt obligations.
"Dollar depreciation can easily gain the acceptance of emerging nations, and the markets are mindful of the soft dollar as a long-term theme," said Daisuke Karakama of Mizuho Bank.
It was against this backdrop that the Bank of Japan decided against easing its monetary policy further on Thursday, despite a harsh consumer price situation.
"The BOJ's stance on its inflation target is wavering," said Kosuke Hanao of HSBC, sharing the view of other market players as they stepped up yen-buying and dollar-selling.
The short term may see sharp swings in the yen exchange rate since speculators have been guiding the market since last week. But because the period of yen depreciation underway since 2012 was born out of the BOJ's superloose monetary policy and the U.S. Fed's hawkish tendencies, fewer observers see the yen returning to a weakening trend.