Yen slips as intervention threat persists, dollar steady

The Japanese yen experienced a decline on Monday as traders remained cautious about potential currency intervention, following last week's market volatility. This came amid a series of rate hikes and assertive signals from central banks, particularly the Bank of Japan, which helped bolster the dollar's strength. With Japanese markets on a three-day holiday, low liquidity further heightened traders' vigilance.

The dollar managed to rise by 0.2% against the yen, trading at 157.20 yen. The Bank of Japan had raised rates to their highest level in 31 years, reaching 1.25%, but mixed votes and a lack of explicit hawkish guidance from the central bank left investors hesitant to invest in the currency. The yen's value experienced a sharp drop following the BOJ's decision, before recovering slightly as reports emerged of Japanese officials conducting rate checks, historically seen as an indicator of possible currency intervention.

Lee Hardman, a senior currency analyst at MUFG, noted that the rate check should help alleviate market expectations about the extent of the yen's weakness in the short term. Apart from the Bank of Japan, both the Federal Reserve and the European Central Bank also increased rates this month, warning that further tightening could be necessary to combat inflation resulting from the ongoing war in the Middle East.

The dollar remained relatively stable at 100.23 following a more than 1% increase last week, spurred by the Federal Reserve's rate hike. Traders have a 55% probability of a Federal Reserve rate hike at their next meeting in October, up from 43% the previous week, according to the CME FedWatch tool. The euro remained unchanged at $1.149 after the far-right Alternative for Germany party secured first place in state elections in northeastern Germany, while Chancellor Friedrich Merz's conservative party faced its most significant regional election defeat in postwar Germany, making it challenging for him to retain power.

Despite a strong performance in early September, the yen has since lost some of its gains. Speculators grew more bullish on the yen as the BOJ meeting approached, with net long-yen positions increasing to $9.7 billion, the highest since July 2025, according to weekly US regulatory data. Fred Neumann, HSBC's chief Asia economist, emphasized the difficulty the BOJ faces in convincing markets of its hawkish stance due to the Federal Reserve's hawkish signal following its unanimous decision to raise its policy rate.

Thomas Mathews, head of markets for Asia-Pacific at Capital Economics, highlighted that while the BOJ's rate hike remains effective, the market perceives the Fed as more hawkish. However, given the yen's current strength, it may require a more significant depreciation before intervention is considered again. The yen had reached a four-decade low of 163.99 per dollar in July, before a rare coordinated intervention by Tokyo and Washington helped stabilize the currency's value.