Yen tumble continues as weakness spreads beyond the dollar

The yen’s historic weakness is spreading from the dollar into other currency crosses as the Bank of Japan’s policy isolation grows.

Bloomberg’s Correlation-Weighted Currency Index for the yen — a gauge of its relative strength against a broad basket of Group-of-10 peers — slumped to a seven-year low Wednesday. A bigger-than-expected interest-rate hike by the Reserve Bank of Australia Tuesday and a likely hawkish European Central Bank meeting Thursday have ramped up the policy contrast with a still super-dovish BOJ.

The Japanese currency extended losses against the greenback, falling as much as 0.8% to 133.71 per dollar — a fresh 20-year low.

Japan’s central bank renewed its pledge of super-loose policy Monday, with Governor Haruhiko Kuroda saying the economy is still in the middle of a recovery from the pandemic and faces downward pressure from rising commodity prices. Thus “monetary tightening is not at all a suitable measure,” he said.

“Kuroda’s comments were the catalyst for accelerating yen selling, as they renewed market focus on monetary policy divergence,” said Jun Kato, chief market analyst at Shinkin Asset in Tokyo. “The picture of the yen being left out as a lone loser came to the fore as markets actively price in an ECB rate hike while the Australian dollar remains on an uptrend with its clear tightening stance.”

Kuroda reiterated this point on Wednesday while speaking to parliament, saying that the BOJ will keep up its monetary easing.

While some market players are cautious about the chances the dollar-yen will break its 2002 high of 135.15, buying momentum in yen crosses increases the likelihood of that happening.

“There is a potential that such all-out yen weakness could drive dollar-yen higher past 135 with an overshoot to around 137,” said Hideki Shibata, senior rates and currencies strategist at Tokai Tokyo Research Institute.

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