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Yen Declines Following Suspected Intervention, Focus Shifts to Fed Meeting

The yen experienced a drop against the dollar on Tuesday, relinquishing some of the significant gains it had made the previous day, which were triggered by suspected intervention by Japanese authorities.

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The currency dipped by 0.40% to 157.00 per dollar, albeit still above its 34-year low of 160.245 recorded on Monday. Traders attributed Monday’s rebound of nearly six yen to alleged yen-buying intervention by Tokyo.

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While Japanese authorities have not officially confirmed their involvement in the currency market to support the yen, markets remain vigilant for any signs of intervention, particularly with the Federal Reserve’s monetary policy review scheduled for later this week.

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Official data confirming or refuting the occurrence of intervention won’t be available until late May.

Although some market participants had pinpointed 160 yen per dollar as a potential intervention threshold, analysts suggest that Japanese authorities may not be specifically targeting certain exchange rate levels.

Despite the recent rebound, the Japanese currency still trades lower than before the Bank of Japan’s policy announcement last week and has recorded its most substantial monthly decline since January.

Investors anticipate that Japanese bond yields will continue to remain low for an extended period, while U.S. rates remain relatively high, providing room for yen depreciation.

Garvey Padhraic, regional head of research Americas at ING, noted, “Facing that (the rates divergence) with forex intervention typically does not end well. The more obvious solution to this is for Japanese rates to rise. If they don’t, something will have to give. And the bigger the hold-out, the bigger is the subsequent reaction.”

The Federal Reserve begins its two-day monetary policy meeting on Tuesday, with expectations that it will maintain rates at 5.25%-5.5%, especially with U.S. inflation persisting. A hawkish message from the Fed could lead to further selling of the yen, according to Carol Kong, a currency strategist at the Commonwealth Bank of Australia.

As for the divergent economic outlooks, while the timing of any potential rate hikes by the Bank of Japan remains uncertain, traders are reducing their bets on Fed rate cuts this year due to stronger-than-expected U.S. economic data and persistent inflation figures.

The dollar advanced by 0.16% to 105.69 against a basket of currencies ahead of the Fed’s meeting.

Thierry Wizman, global forex and rates strategist at Macquarie, remarked, “Fresh U.S. data has prompted our U.S. economist to push out his projection of the start of the Fed’s easing cycle to 2025 from December 2024. We don’t rule out that the next change may be a hike, which would prompt a new wave of broad-based U.S. dollar strength.”

While other major central banks like the European Central Bank and the Bank of England may consider rate cuts in the near future, the policy path remains uncertain after recent developments.

Euro zone inflation is showing signs of returning to 2%, with ECB Vice President Luis de Guindos noting on Monday that the process might be turbulent and geopolitical tensions could pose an upside risk to price growth.

Market watchers await European inflation data later on Tuesday for further insights into the ECB’s rate-easing cycle. The euro and sterling both experienced declines against the dollar.

Elsewhere, a weak retail sales figure from Australia led to a decline in the Aussie dollar, while in China, manufacturing and services activity slowed in April.

In the cryptocurrency market, bitcoin saw a slight increase to $63,357.00.

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