Yen's slide to weekly loss prompts bets for another intervention

The yen experienced its largest weekly loss in three months on Friday, as the effects of U.S. and Japanese intervention diminished, prompting traders to speculate further intervention may be required to halt the downturn. The currency has retraced roughly half the gains from intervention in late July and early August, slipping about 1% this week to 159.43 per dollar.

It was close to 164 per dollar before July's intervention, with traders eyeing the 160 level as a potential trigger for more official action. The yen's decline marked its biggest weekly drop since May, when it also experienced a slide after a round of official buying. The Japanese currency had been stable at the start of Friday but had been falling for years, nearing four-decade lows before intervention due to low interest rates and concerns over government spending and funding.

The broader currency market remained relatively stable this week, buoyed by higher oil prices and Middle East tensions, alongside benign U.S. jobs and inflation data that reduced expectations for U.S. interest rate hikes. On the economic side, U.S. producer prices remained unchanged in July, further supporting expectations of a September hike, which now stands at about a 35% chance.

The euro saw a slight dip of 0.2% to $1.1536, while the British pound remained flat at $1.3489. A surprisingly low inflation expectation reading hit the New Zealand dollar on Thursday but it bounced back as the swap market favored an 85% chance of a September rate hike. The Australian dollar hovered around $0.7060. Japan might undertake additional coordinated yen intervention at any moment and hint at faster-than-anticipated interest rate hikes to curb further declines, according to Mitsuhiro Furusawa, former top currency diplomat of Tokyo.

Markets have already anticipated the Bank of Japan raising rates sooner and more aggressively than initially expected following U.S. Treasury Secretary Scott Bessent's suggestion that Japan should bolster currency intervention with policies and fundamentals supporting the yen. While the market seems prepared for a BOJ hike in September, with a 76% probability, the onset of disappointment could still lead to further yen depreciation.

China's yuan traded at 6.7452 in offshore markets on Friday, near a 3-1/2-year high last week. South Korea's won, also supported by official intervention, remained steadier than the yen but was expected to see a minor loss of 0.6% against the dollar this week. Interventions, although powerful and sometimes coordinated, are generally temporary and may serve only as a temporary shield against market challenges, according to Omar Slim, co-head of Asia public fixed income at MetLife Investment Management.