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The yen has dropped to its lowest level since 1986, putting traders on red alert.

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File Photo: JPY (Japanese Yen): Definition, Symbol, History, Trading

File Photo: JPY (Japanese Yen): Definition, Symbol, History, Trading

On Wednesday, the yen fell to its lowest level versus the dollar since 1986, leaving currency markets on edge for any hints of Japanese government action to support the battered currency.
The US dollar was trading at 160.39 yen, a level last seen in December 1986, as the two nations’ massive interest rate differential continued to crush Japan’s currency.
Analysts said traders were testing the commitment of Japan’s Ministry of Finance and central bank, which spent $62 billion in late April and early May to stabilize the currency after it went below 160.

“Unless the underlying dynamics change with the yield differential, it keeps getting punished,” said Joe Tuckey, head of FX research at broker Argentex.
Carry trade methods, in which investors borrow in low-yielding currencies to invest in higher-yielding ones, have grown in popularity as certain nations’ borrowing rates have risen in recent years.
Although Japan has boosted interest rates this year to a range of zero to 0.1%, U.S. rates of 5.25% to 5.5% indicate that investors are flocking to higher-yielding dollar assets, pushing up the currency’s value against the yen.

Top currency diplomat Masato Kanda warned on Monday that Japan was always prepared to intervene in response to abnormal market movements, but traders disregarded the warning after the last round of intervention did nothing to prevent the selling.
“Perhaps a new months ago that would have been heeded more by the market than it is now, because it’s not being backed up by any change in rates,” Tuckey told the crowd.
The Bank of Japan may raise interest rates again in late July, helping to boost the yen. However, any sustained rebound is likely to need Federal Reserve interest rate decreases.

The dollar index, which measures the currency’s performance versus six rivals, increased 0.3% to 105.99, its best level since May 1.
Currency markets will be closely watching Friday’s personal consumption expenditure (PCE) inflation data from the United States. A lower-than-expected figure may lead traders to increase their bets on Fed rate cuts this year, bringing some comfort to the yen.
The euro fell 0.3% to $1.0683 after a European Central Bank policymaker raised the prospect of more rate reduction this year, a marked departure from the Fed’s Michelle Bowman.

Olli Rehn, a member of the ECB’s governing council, told Bloomberg that two further cuts this year was “reasonable”. This contrasts with Fed Governor Bowman’s statement that no rate reduction are expected in the United States this year.
In May, Australian inflation increased to a six-month high of 4%, prompting traders to put in a good possibility of another rate rise by November and sending the Aussie currency up 0.5% before cooling to stand 0.1% higher at $0.6656.
Sterling fell 0.3% to $1.2647 as the dollar surged.
The yuan was also under pressure from the dollar’s relentless strength, with China seeming to express some tolerance for a cheaper currency by progressively decreasing the midpoint of the yuan’s daily trading range against the dollar.
On Wednesday, the yuan fell to a seven-month low of 7.2671 per dollar, having previously remained close to the bottom end of its trading range.

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