Dollar Loses 2% Against Yen Amid Fresh Inflation Data, Prompting Market Jolt

On Thursday, the dollar experienced a significant decline of around 2% against the Japanese yen, causing a sudden stir in the market due to fresh U.S. inflation data. The yen was trading at 158.55 against the U.S. dollar around 3 p.m. London time, marking a noticeable shift from its earlier position at 161.52. According to Reuters, this surge represents the yen's most significant daily rise since late 2022.

Driver of the Yen Rally

The U.S. dollar saw an increase following its lowest CPI (consumer price index) reading in over three years. Currency experts pointed to the U.S. data as the catalyst for the yen's movement. Kit Juckes, global head of foreign exchange strategy at Societe Generale, highlighted that the "driver of the yen rally is big shorts and a surprise in CPI." This insight underscores the impact of shorting, which involves betting on the decrease in an asset's price. This development comes at a time when traders are closely monitoring potential yen interventions by Japanese authorities in their efforts to support the struggling currency.

Possible Intervention by Japanese Authorities

While there is no definitive evidence of intervention, some experts suspect that the broad dollar sell-off, triggered by stop loss triggers primarily in JPY, may have prompted the Ministry of Finance (MoF) to execute modest intervention. Stop losses refer to market orders that activate when an asset hits a specified price. Although Masato Kanda, the vice-minister of finance for international affairs of the Ministry of Finance, refrained from commenting on any possible intervention, Japan had previously confirmed its first currency intervention since 2022, amounting to a $62 billion spending spree between April 26 and May 29.

Strategic Currency Rebound

The timeline of this intervention coincided with a notable recovery in the Japanese currency in the preceding weeks. The yen had initially plummeted to a 34-year low of 160.03 against the U.S. dollar on April 29, after which it rebounded to 156 levels during the same session, sparking speculation of potential Japanese authorities' intervention.

Challenges Faced by the Yen

The yen has been under sustained pressure since the Bank of Japan ceased its monetary policy of negative interest rates in March. Japanese Finance Minister Shunichi Suzuki has voiced support for interventions, particularly if sharp currency movements begin to impact households and companies. Notably, Japan's last intervention to stabilize the currency occurred in October 2022 when the yen slid to around 152 per dollar. Throughout that year, authorities reportedly spent a combined total of as much as 9.2 trillion yen to stabilize the currency.