TOKYO -- The Japanese currency has started stiffening again against the greenback amid the growing view that the U.S. Federal Reserve won't be raising interest rates as boldly as expected earlier.
The yen rose to its highest level in roughly one year and five months on Tuesday in Tokyo. Large-volume orders to sell dollars for yen started coming in sporadically after 3 p.m., when trading in Europe typically shifts into gear. This sent the U.S. currency below 110.5 yen, replacing the 110.67 yen year-to-date low reached in mid-March.
The dollar fell further in the European and U.S. markets, sinking below 110 yen at one point, reaching a level that hasn't been seen since late October 2014, when the Bank of Japan stepped up its monetary easing program.
The main driver is a change in U.S. rate hike expectations. Federal Reserve Chair Janet Yellen said in a speech March 29 that the U.S. central bank would proceed cautiously with interest rate increases in light of slowing emerging economies and other developments. Her words have been interpreted as an indication that the U.S. may raise rates just once this year. The prevailing view at the start of the year was that 2016 would see four rate hikes, but this had been scaled back to two by March.
With a significant increase in U.S. interest rates now out of the question, the interest rate gap between Japan and the U.S. is unlikely to rise as much as market players had anticipated. This realization has turned the dollar-buying, yen-selling trade -- which had been prevalent until last year on anticipation of an expanding rate gap -- on its head.
Flight to safety
Another factor is falling oil prices. With demand for oil not expected to recover anytime soon due to the downturn in emerging economies, crude prices have started heading south again. West Texas Intermediate futures, for instance, have fallen to the low-$35-per-barrel range to the lowest in about a month, extending losses since a recent high in late March to 15%.
Steep oil price declines have chilled investor sentiment as they will hit resource-producing nations and natural resource-related companies. This dynamic was at work in Tokyo on Tuesday, as investors stepped up yen buying, a move seen as a flight to safety, as oil prices fell.
Traders on toes
With the yen strengthening to the highest level since the BOJ expanded its easy-money policy, foreign exchange traders are becoming mindful of the possibility of market interventions by the Japanese government. When Chief Cabinet Secretary Yoshihide Suga said in a Tuesday evening news conference that the government "will monitor movements in the foreign currency market intently," the dollar shot up by roughly 0.4 yen right away, revealing traders' nervousness.
Some market players believe that the yen's appreciation will drive the BOJ to even more accommodative monetary measures to prevent the Japanese currency from rising further.
But the fact that the yen strengthened right after the central bank decided to implement a negative interest rate policy in late January "has shattered the existing framework where monetary easing by the BOJ sends the yen lower," said Minori Uchida, chief forex analyst at Bank of Tokyo-Mitsubishi UFJ.