The dollar rose above the 160 mark against the yen, setting a new high in nearly 40 years. Strategist: Further intervention may be equally ineffective

Forex Platform- With the yen falling rapidly below milestones in a row, the Japanese authorities face the grim reality that the yen's decline will not stop unless the Federal Reserve abandons its long-term policy path of maintaining high interest rates. And the Fed can do nothing about it.

Global investors widely recognize how America's high borrowing costs support the dollar and affect the rest of the world. The yen's continued plunge is an extreme manifestation of America's financial dominance in a global currency market that trades at $7.50 trillion a day.

"It's all about the Fed," says Andrew Brenner, head of international fixed income at NatAlliance Securities LLC. "Keeping rates high for a long time will attract capital into the US and keep the dollar strong." For Japan, "it's a problem."

America's dominance of the global financial marekt was on full display on Wednesday (June 26). A key measure of the dollar closed at a new year-to-date high, weighing on the rest of the world's currencies. U.S. stocks are headed for another strong quarter, while the US Treasury easily found buyers for its $70 billion bond auctions.

The dollar rose 0.7 per cent against the yen on Wednesday to 160.87, its highest level since 1986, before narrowing gains to hover around 160.70, surpassing the level of official intervention in the market in April. The euro rose to a record high of 171.80 against the yen.

In the midst of these moves, Japan's top monetary official, Masato Kanda, reiterated that authorities are urgently watchingforeign exchange marketWe will take appropriate measures as necessary.

However, efforts by Tokyo officials to prop up the yen, which has been weakening in the past few weeks since Asian countries poured a record 9.80 trillion yen (more than $60 billion) into currency markets, have so far failed - and strategists say further intervention could be equally ineffective.

Bob Savage, head of market strategy and insights at BNY Mellon's capital markets division, said: "I don't think any of these measures will work unless the Fed really eases monetary policy. In the grand scheme of things, you have to reduce Japanese demand for dollars. Either get long-term rates high enough or get US rates low enough. Neither of those things happened."

Main factors

Data from the US Commodity Futures Trading Commission on Monday showed asset managers were betting on a weaker yen after the worst week for asset managers since 2006. The wide interest rate gap between Japan and the US has been the main factor behind the yen's decline this year.

At the start of the year, traders expected the Federal Reserve to launch a series of interest rate cuts, leading the world's major central banks to ease policy, while the Bank of Japan opted to abandon its ultra-low interest rate policy. However, a strong US economy and high inflation kept the Federal Reserve on hold, while the Bank of Japan raised interest rates slightly.

Kathy Jones, chief fixed income strategist at Charles Schwab, said: "The yen should have risen along with Japanese interest rates this year." But for now, "the wait continues."

Future catalyst

The Federal Reserve's most prized measure of US inflation will be the next big catalyst for the yen on Friday as economists expect core personal consumption expenditure inflation, which excludes the volatile food and energy categories, to slow, potentially strengthening the case for the Fed to cut borrowing costs this year.

The stakes are high for Japan. Citigroup estimates that the country has $200 billion to $300 billion to fund any further intervention, which would include selling off its cash reserves in dollars and other currencies and even selling government bonds around the world to buy yen.

market view

Vassilis Karamanis, FX strategist at Bloomberg, said: "If the dollar breaks through 163 against the yen this week, it could prompt the Japanese Ministry of Finance to take action as it would push the real volatility above 10 per cent and the currency is about Y10 above its May 16 low."

Dominic Konstam, head of strategy at Mizuho Securities, added that while the BoJ normalised monetary policy, any intervention would be more about "slowing down the process of the yen reaching an eventual bottom". "The problem they face is that they are intervening in the wrong direction," he said. "They have limited reserves and cannot spend hundreds of billions of dollars defending the currency."