Tokyo was forced to take action in the foreign exchange market to support its weakened currency after the Bank of Japan (BoJ) kept its monetary policy ultra-loose on Thursday. The Japanese government sold US dollars after the yen fell past the 145 mark against the dollar following the BoJ’s decision to leave benchmark interest rates in negative territory, on a day when other central banks raised borrowing costs in a bid to reduce inflation. Japan’s finance minister for international affairs, Masato Kanda, told reporters that the government had “taken decisive measures” to counter the yen’s sudden fall in the foreign exchange market. The intervention, which lifted the yen 2 percent against the dollar back to 141.2, showed Tokyo had lost patience with the currency’s steady retreat and highlighted the impact a rising U.S. dollar is having on major economies. Prime Minister Fumio Kishida said Japan would respond decisively to excessive fluctuations in the foreign exchange market. Analysts warned, however, that the intervention could be ineffective as long as the BoJ maintained its policy of ultra-low interest rates at a time when other central banks are tightening. “The timing was very bad,” said Fawad Razaqzada, market analyst at City Index and Forex.com. “In essence, is the BoJ undoing the government’s attempt to prop up the yen?” The dollar had hit a fresh 20-year high against a basket of currencies before Tokyo’s intervention after the Federal Reserve raised U.S. interest rates by 0.75 percentage points on Wednesday, its third straight 75 basis point increase. The dollar has strengthened steadily this year, in part because U.S. interest rates have risen faster than in other countries. Fears that the global economy is weakening as inflation soars have also driven traders to the safe-haven dollar, sending the euro to a 20-year low and the pound to its weakest in 37 years. The two biggest drivers of the dollar’s strength are often described as “the dollar’s smile,” explained James Athey, chief investment officer at Abrdn. “At one extreme is Fed policy tightening, at the other is risk aversion – after all, the US dollar is the world’s reserve currency. For the last 18 months or so they’ve been playing both ends of the smile at the same time,” Athey added. Subscribe to Business Today Get ready for the business day – we’ll point you to all the business news and analysis you need every morning Privacy Notice: Newsletters may contain information about charities, online advertising and content sponsored by external parties. For more information, see our Privacy Policy. We use Google reCaptcha to protect our website and Google’s Privacy Policy and Terms of Service apply. A series of other central bank announcements added to market volatility on Thursday. The Bank of England raised its key interest rate by another half a point, to a 14-year high, while Switzerland’s SNB raised its key rate outside negative territory for the first time since 2014, up 75 basis points. The rise, from minus 0.25% to 0.5%, hit the Swiss franc as traders expected a full percentage point increase. Norway’s Norges Bank raised its borrowing costs by half a point. It forecast a more gradual rise of 25 basis points in its next session, which weakened the Norwegian krone. However, the Central Bank of the Republic of Turkey surprised markets by cutting borrowing costs by one percentage point from 13% to 12%, even as Turkish inflation hit 80% in August. The surprise cut sent the Turkish lira to a new record low, adding to pressure from the hawkish US Federal Reserve on emerging market currencies. The CBRT has cut rates steadily over the past year, from 19% last summer, despite warnings that the move would hit the currency and raise inflation. “You have to wonder what it will take for the CBRT to accept that its experiment – at the worst possible moment – has failed, but it’s clear that we’re nowhere near that point. More pain to come, it seems,” said Craig Erlam, senior market analyst at OANDA.
