Yen sinks to 40-year low as oil shock boosts dollar
The yen slumped to 40-year lows against a resurgent dollar driven by oil price spikes, highlighting a widening divergence in central bank policies that pressures Japanese authorities to intervene.
The dollar surged to its strongest level against the yen since November 1986, hitting 163.98 on Thursday before settling at 163.81. The greenback is now set for its largest weekly gain in five weeks, up roughly 0.7%, while the Japanese currency is poised for its steepest weekly drop in more than two months.
The immediate catalyst is a reversal in oil prices driven by renewed strikes in the Iran war, which began on February 28. Brent crude retreated slightly to $96.48 on Friday after touching a two-month high of $102 the previous day. Higher energy costs have revived inflation fears, but the U.S. economy is viewed as more insulated from these shocks than Europe or Japan, driving capital toward the dollar.
For Japan, rising oil prices represent a severe terms-of-trade shock that punishes the low-yielding yen. "It's not surprising that dollar-yen has gone up under the conditions that we're facing," said Thierry Wizman, global FX & rates strategist at Macquarie Group. "So if there's going to be a currency that the specs are going to go after in those conditions, it's going to be the yen."
Japanese Finance Minister Satsuki Katayama reiterated the government's readiness to intervene in the foreign exchange market. However, analysts expect any unilateral action to be short-lived without a more aggressive rate-hike path from the Bank of Japan. The U.S. Treasury Department added to the pressure on Thursday, explicitly calling for BOJ rate hikes and warning that excessive currency volatility is undesirable. Despite this, LSEG data shows markets have completely priced out a rate hike at the BOJ's policy meeting next week.
The oil-driven inflation resurgence is also shifting expectations for the Federal Reserve. Traders now price a 35.8% chance of a U.S. rate hike next week, a sharp increase from 12.8% just a week ago. J.P. Morgan chief U.S. economist Michael Feroli expects the Fed to hold rates steady but anticipates at least two hawkish dissents, noting that "some on the committee are losing patience with above-target inflation."
The euro slipped to $1.1369, marking a 0.6% weekly decline after the European Central Bank left rates unchanged. Still, traders are pricing in a 70.8% chance of a September hike. ECB chief economist Philip Lane said the central bank views the current inflation shock as medium-sized, requiring measured policy action to return price growth to 2% over the next year.
