Euro to yen hits 2008 highs, markets eye Tokyo intervention

Euro to yen rate soars to 2008 highs with BoJ meeting in view

The Japanese yen fell to multi-year lows against both the dollar and the euro on Tuesday, prompting investors to closely monitor potential intervention as the Bank of Japan's meeting approaches later this week.

Meanwhile, dovish remarks from policymakers have left the British pound near its lowest levels in recent months.

On Tuesday, the euro soared to 165.62 yen, marking its highest level since 2008, buoyed by data indicating that business activity in the euro zone had expanded at its quickest pace in nearly a year, driven by a resurgence in the services sector.

As of 12:40 GMT on Tuesday, the euro to yen exchange rate hovered around the 165.19 mark. The EUR to JPY rate has gained 6.12% year-to-date, indicating the increasing weakness of the Japanese yen.

Lee Hardman, senior currency strategist at MUFG, commented on the dynamics to Reuters:

"That's a combination of the stronger euro today [...] and the yen continuing to weaken on the expectation that the BOJ will be very gradual in tightening policy”.

Similarly, the dollar climbed to 154.87 yen, reaching its highest point since 1990 and approaching 155 JPY— a level many market participants view as a potential trigger the Japanese authorities to intervene in currency markets to prop up the yen.

The Japanese yen has been losing value since the Bank of Japan’s historic shift away from its ultra-loose monetary policy in mid-March this year, when it raised interest rates for the first time in 17 years. The hike did little to support the currency, with senior government officials ramping up rhetoric of yen intervention in recent weeks in their attempts to shore up the currency.

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Markets question authorities’ “jawboning” on yen intervention

Japanese Finance Minister Shunichi Suzuki indicated last week that discussions with U.S. and South Korean counterparts had established a solid foundation for Tokyo to counteract excessive fluctuations in the yen, issuing a strong warning about the possibility of intervention.

However, skepticism remains about Tokyo's willingness to intervene so close to the Bank of Japan's two-day policy meeting set to begin on Thursday.

The Bank of Japan is expected to forecast that inflation will hover around its 2% target for the next three years in its upcoming report on Friday, suggesting a readiness to cautiously increase interest rates from near-zero levels later this year.

MUFG’S Lee Hardman added:

“We've had jawboning now for a number of weeks, and they still haven't come in and intervened directly. [...] So people are questioning what's going to bring them to the table”.

BoE comments boost investor confidence of interest rate cuts

The euro also rose by 0.39% against the dollar to $1.0695, reaching a one-week high, although it later leveled off to trade flat on the day at $1.06558. Despite recent declines, the common currency stabilized after the release of favorable German PMI data.

Bank of England officials have commented that they expect inflation n to return to the 2% target and remain stable, boosting investor confidence that rate cuts by the Bank of England may occur this summer.

Previously, the pound benefited from projections that the Bank of England would delay rate cuts longer than the European Central Bank, which is anticipated to begin loosening monetary policy in June. Meanwhile, the U.S. Federal Reserve is seen as one of the last major central banks to cut interest rates, with markets currently pricing in an 80% likelihood of the Fed’s first rate cut by September.

This marks a significant change from just a few weeks ago, when markets were betting on a June start for the U.S. rate-cutting cycle — a shift that propelled the dollar upwards.

On Monday, the pound fell to a five-month low of $1.2299 against the dollar, though it later stabilized at $1.234, as strong British business activity data helped keep it steady.

Markets eye US GDP, PCE data to be released this week

This week provides another opportunity to gauge the strength of the U.S. economy, with the release of first-quarter gross domestic product data on Thursday and the personal consumption expenditures index (PCE index) — the Fed's favored inflation measure, which excludes volatile food and energy prices — on Friday.

Carol Kong, currency strategist at Commonwealth Bank of Australia, told Reuters:

“It is conceivable that markets further push back the timing of the expected first rate cut from September, if this week’s GDP and/or PCE adds to concerns about disinflation stalling. The risk therefore lies towards higher U.S. yields and a stronger USD”.

Market forecasts anticipate a 0.3% increase in the headline PCE figure for March, unchanged from February, with an annual increase of 2.6% — up from a 2.5% rise the previous month, according to a Reuters poll.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.