Yen weakens as G7 coordinates monetary intervention

The costly episode of knock-and-run initiated by a speculative element within the foreign exchange market after disaster struck Japan came to a crushing end on Friday. Dealers had been dashing up the driveway, ditching dollars, stealing yen and dinging on the doorbell in a quest to see whether anyone would ever open up. Today they got a rather loud answer as the door slammed open and a torrent of official intervention was unleashed not just by Japan, but also from the global alliance of G7 nations.

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Japanese yen – Vice Finance Minister Igarashi expressed hopes that today’s currency intervention would put a floor beneath the dollar’s value against the yen following a surge to a post WWII peak when dawn was breaking in Japan on Thursday. He also noted that it would be logical for the yen to fall and for yields to rise following the disaster as the nation issues bonds to fund a disaster response. Mr. Igarashi said that this was also the authorities’ worst fear. The Bank of Japan has subsequently confirmed that it sold less than ¥2 trillion against the dollar while statements from the Bank of England, the German Bundesbank and the Banque de France confirmed that they would also intervene. The yen fell the most since 2008 and currently trades at ¥81.49 having earlier reached ¥82.00. The G7 also said they may intervene to suppress the value of the yen against the euro, causing the euro to rise by 4.1% to buy ¥115.25. The coordinated nature of intervention is the first since central bankers bought the ailing euro in 2000 shortly after its birth.

Aussie dollar – The Aussie also surged by around 4.6% versus the yen to purchase ¥80.85 on Friday. Stocks in Japan recovered with a 3.5% gain as dealing with the rising yen helped provide some respite to exporters. The Nikkei 225 index nevertheless closed the week with a 10% loss. Intervention efforts and recovering equity markets provided a weekend tonic for the Aussie as it rose to 99.48 U.S. cents during the European session before paring gains in response to an after-hours increase of 50 basis points in the reserve ration requirement by the PBOC. The timing of that move seems at odds with the coordinated attempts to weaken the yen, but don’t forget that the Chinese yuan is not sufficiently traded to qualify it as a reserve currency.

U.S. Dollar – The dollar’s use as a store of value lately has been questionable to say the least. The dollar index remains at its lowest since November and is heading to a lousy end to the week at 75.88. Despite its jump against the yen today it is being outflanked across all fronts elsewhere possibly because the natural disaster in Japan is likely to clip the wings of global growth leaving U.S. monetary policy on hold for longer than was thought just one week ago.

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