Japanese yen rebounds from 18-month low against dollar

NEW YORK – The Japanese yen rebounded from an 18-month low against the dollar on Wednesday as Japanese officials warned of potential intervention to shore up the currency, while the US currency was modestly stronger against the euro as traders continued to evaluate likely Federal Reserve policy.

The yen has tumbled on concerns about looser fiscal and monetary policy as speculation rises that Prime Minister Sanae Takaichi will call an early snap election, a move that could delay parliamentary approval of a bill that grants the government the right to issue deficit-covering bonds.

“Takaichi’s plan to leverage her astonishingly high personal ratings in calling a snap election is translating into a rise in bets on reflation in the Japanese economy, more government spending and higher yields,” said Karl Schamotta, chief market strategist at Corpay in Toronto. “All of that is translating into downward pressure on the yen, which of course is being offset by intervention threats from authorities.”

YEN WEAKNESS OVERDONE?

Japanese Finance Minister Satsuki Katayama issued another verbal warning on Wednesday, saying officials would take “appropriate action against excessive FX moves without excluding any options.”

So far, however, officials have not indicated that an intervention is likely in the very near term.

“It would come as a little bit of a surprise to markets since recent commentary hasn’t conveyed much urgency,” said James Lord, global head of FX & EM strategy at Morgan Stanley.

Some also see weakness in the yen as having moved too far.

Analysts at LMAX Group note that from a technical perspective, “there are signs of a meaningful top in place after the market put in a multi-year high in 2024.”

From a fundamental perspective, “speculative yen longs have been largely unwound, leaving room for fresh short positioning if USD/JPY breaks higher through 160, though rising intervention warnings from Japanese officials add two-way risk,” they said in a report.

The yen strengthened 0.43% against the greenback to 158.46 per dollar. It earlier reached 159.45, the weakest since July 2024.

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.06% to 99.13, with the euro down 0.03% at USD 1.1637.

FEDERAL RESERVE EXPECTED TO HOLD RATES

The dollar has benefited in recent weeks from rising expectations that the Fed will keep rates on hold for the next several months.

That was further boosted after data on Friday showed that the unemployment rate dipped to 4.4% in December.

Morgan Stanley pushed back its expectations for rate cuts to June and September, from January and April, after Friday’s jobs data.

“Up until now we have been quite focused on the labor market, but with the reduction in the unemployment rate we think it’s going to be difficult for that to be the driver of any near-term cuts,” Lord said.

“That arguably reduces the case for the dollar to weaken in the way that we’ve been expecting so far this year. But at the same time, I do think a lot of the uncertainty that’s been injected into the Fed debate given recent events is pushing in the other direction,” Lord added.

Concerns about Fed independence have increased as the Justice Department undertakes a criminal investigation into Fed Chair Jerome Powell in relation to a building renovation.

Powell called the investigation a “pretext” for the White House to gain more influence over interest rates, which US President Donald Trump wants cut dramatically.

The dollar was little changed on data on Wednesday showing that US producer prices picked up slightly in November amid a surge in the cost of gasoline, while US retail sales increased more than expected in November.

The Fed’s “Beige Book” also showed that economic activity increased in most parts of the United States and employment was mostly unchanged in recent weeks.

Traders remain focused on rising geopolitical tensions.

Iran has warned neighbors hosting US troops that it would hit American bases if the United States strikes, a senior Iranian official told Reuters on Wednesday, as Iran seeks to deter Trump’s threats to intervene on behalf of protesters.

In cryptocurrencies, bitcoin gained 3.58% to USD 97,428.

(Reporting by Karen Brettell; Additional reporting by Gregor Stuart Hunter, Amanda Cooper, Rod Nickel, and Will Dunham)