The Japanese yen held near a 40-year low against the dollar on Wednesday, after touching 163.24 in New York trade a day earlier, as an 11th consecutive night of U.S. strikes on Iran pushed oil and Treasury yields higher and left Tokyo weighing another round of currency intervention.
The currency traded at 163.21 in early Asia dealing after hitting its weakest level since late 1986. Brent crude futures reached a six-week peak of $91.99 a barrel, the 30-year Treasury yield climbed to a two-month high of 5.15%, and the benchmark 10-year yield touched its highest since May at 4.64%, widening the interest-rate gulf with Japan.
Japan's Ministry of Finance intervened in record size in April and May, after the dollar-yen rate first crossed 160. Traders now expect another attempt, driven by the same forces that have pinned the currency this week: a safe-haven bid for the dollar, higher U.S. yields and a war premium on the crude Japan overwhelmingly imports.
War premium builds
The dollar gained broadly overnight, briefly pushing the euro just below $1.14, and it held its ground as U.S. Central Command completed an 11th straight night of strikes on Iranian targets. The euro was last at $1.1401, the Australian dollar clung to the 70 cent level and the New Zealand dollar sat just above its 200-day moving average of $0.5825. Sterling fell through its 200-day moving average to $1.3385.
"A continuation of the Middle East conflict should support the dollar because of its safe-haven status and typically positive correlation with oil prices," Commonwealth Bank of Australia currency strategist Samara Hammoud said. Whenever the 30-year yield breaches 5%, it tends to ripple through global markets, raising the bar for riskier investments and supporting the dollar. A 20-year Treasury auction is due later Wednesday.
Chip shipments jump
Japanese exports rose 19.3% in June from a year earlier, the fastest pace since November 2022 and above the 18.6% rise forecast by economists polled by Reuters. Semiconductor shipments surged 53.8%, powered by an AI buildout that has lifted shares of Tokyo Electron, Renesas Electronics and Advantest between 50% and 93% this year. Exports to Taiwan climbed 46.4%, to China 17.6% and to the U.S. 13%.
Volumes, however, rose just 0.2%. Capital Economics head of Asia-Pacific Marcel Thieliant said the strength in export values is almost entirely a result of soaring export prices, reflecting both the weaker yen and higher memory-chip prices. The Nikkei 225 rose 1.56% after the trade release.
Oil bill widens
Imports jumped 25.4% year on year in June, also the fastest since November 2022, led by a 59.3% surge in petroleum shipments as Tokyo absorbed the higher crude bill from the Iran war. Japan meets more than 87% of its energy needs through imports, according to the International Energy Agency. Thieliant noted crude imports rebounded strongly in June but said that with the Strait of Hormuz closed again, they will remain below pre-war levels "for a while yet."
Limits of intervention
Japanese officials have backed off explicit warnings in favor of ambush tactics designed to keep markets on edge. A gambit by Japan's finance minister to redirect part of the government pension fund's foreign holdings into domestic markets has lost its punch.
"We think (Japan) may soon intervene again," HSBC analysts, led by global head of foreign exchange research Paul Mackel, wrote last week. But intervention is unlikely to have lasting impact, they said, unless the Bank of Japan delivers several hawkish rate increases, the Federal Reserve returns to a rate-cut bias or the market's view of Japan's fiscal health shifts. The HSBC base case is for the pair to be trapped in a new and higher range, "mainly 160-165, capped by periodic intervention but supported by negative real rates in Japan."
The Bank of Japan noted at its June policy meeting that overseas economies were experiencing an upswing from AI demand and that, for Japan, "the deterioration in the terms of trade has been mitigated, and concerns over an economic slowdown have subsided." With crude near $92, an 11th night of strikes on Iran and the 30-year Treasury yield above 5%, the mitigation looks increasingly conditional on a war Tokyo cannot end.