A queue of people forms outside an exchange shop (L) as people wait to buy and sell Japanese yen for foreign currencies, along a street in central Tokyo on April 29, 2024.
richard a. brooks | AFP | Getty Images
The Japanese yen is hovering near its lowest levels in three months against the US dollar, after reaching 153.18 late Wednesday.
In the past, the weakness of the Japanese currency was attributed to the difference between US and Japanese interest rates, where lower interest rates tend to pressure currencies, while higher interest rates push them up. Japan has had negative interest rates for about eight years, keeping its currency weak compared to the dollar.
But as the Federal Reserve lowers interest rates and the Bank of Japan raises them, this gap in rates has narrowed. So why is the yen depreciating now?
The yen remains the “lowest-yielding G10 currency ever,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. The G10 refers to the ten most widely traded currencies in the world.
Therefore, holding a long position in the yen is expensive because it offers a much lower interest rate than its currency pair counterpart, which could be the Euro or the US Dollar.
“The annual interest rate on one-month deposits for the yen is +0.03%, while it is 4.76% for the US dollar. This is why the yen cannot rise continuously despite the Fed (or European Central Bank) cutting interest rates. Spread vs. European Central Bank: The yen is simply still too large for many investors to consider holding for long.
Homin Lee, chief economic strategist at Swiss private bank Lombard Odier, told CNBC that the recent fluctuations in the yen are also likely due to market repricing, the return of former US President Donald Trump to the Oval Office, and strong growth indicators in the United States, in addition to… To concerns about the upcoming elections in Japan.
He adds that continued volatile trading in the currency pair “may not be avoidable in the very near term” due to elections in the US and Japan.
However, any further weakness in the yen could lead Japanese authorities to intervene again, Lee said, noting that voters were still dissatisfied with the “extreme cheapness of the currency.”
RBC's Tan believes global risk sentiment needs to weaken sharply in order to strengthen the yen, saying “the yen benefits when global market volatility rises because it is the best safe haven currency.”
The yen tends to weaken against the dollar during periods of risk aversion — when U.S. yields rise while stocks fall — Hugh Chung, chief investment advisory officer at wealth and funds platform Endowus, told CNBC earlier this year in the wake of yen volatility.
US yields are already up, while stocks have taken a hit over the past few days, which appears to have led to a more than 1% drop in the currency's value on Wednesday.
The yen last traded at 151.68 against the dollar on Friday.
