The yen has slid back near 160 per dollar, just weeks after a joint Japan-U.S. intervention pushed it as strong as 156. The rebound points to a rate gap between the U.S. and Japan that intervention alone cannot close, and if tighter policy still fails to halt the slide, the Bank of Japan could be forced to sell U.S. Treasuries to support the currency.
Intervention fades, carry trade returns
USD/JPY has climbed back toward 160, just two weeks after Japan and the U.S. carried out a rare joint intervention to support the yen. At the end of July and start of August, Japan spent around $89 billion and the U.S. added $5 billion to $10 billion, briefly strengthening the yen from 164 to 156 against the dollar.
The bounce did not last because intervention did nothing to close the underlying rate gap between the U.S. and Japan. That gap keeps the carry trade attractive, as investors continue borrowing yen to buy higher-yielding U.S. assets.
Cooling inflation, but the Fed has reasons to stay hawkish
U.S. price pressure has eased. July CPI slowed to 3.4% year over year from 3.5% in June, while core CPI fell to 2.5% from 2.6%. PPI also came in soft, flat month over month versus the 0.2% expected, with annual growth dropping to 4.7% from 5.5%.
Yet oil prices remain elevated, with gasoline still above $4 a gallon and up more than 30% since the U.S. and Israel launched the war, raising the risk of another wave of inflation. Trade tensions add to the pressure: the U.S. is set to impose 50% tariffs on some Canadian goods on Wednesday, and commercial ties with India and China could worsen if Washington toughens sanctions on Iran's trading partners.
As a result, the Fed still has reasons to stay hawkish even as markets bet on a softer path, with the probability of no policy change this year at around 55%.
BOJ faces pressure to tighten or sell Treasuries
If the Fed does raise rates, the Bank of Japan may have no choice but to tighten as well. This week's July inflation data will be crucial, since strong numbers could push JGB yields higher and give the yen some support.
Should tighter policy still fail to stop the yen's slide, which is already hurting Japanese households through imported energy costs, the BOJ could be forced to sell Treasuries to raise cash and support the currency. Markets appear to be pricing in that risk: the U.S. 30-year Treasury yield hit 5.216% at auction, its highest level since 2001.
If Japan does start selling U.S. Treasuries, market volatility could rise sharply — a scenario most investors don't yet expect.
Source: Investinglive
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