Dollar Creeps Back Towards ¥160 as Intervention Fades

The US dollar has begun to creep back towards ¥160 against the Japanese yen, a level that was previously seen as a significant milestone after a joint intervention by Tokyo and Washington. The USD/JPY pair had plummeted from a 40-year high near ¥164 to around ¥155 in one week, but it has since rebounded to roughly ¥159.44.

The intervention, which involved officials supplying yen and selling foreign currencies, was successful as a short-term shock, forcing bearish positions to unwind. However, its impact on the long-term trend change is less convincing, with traders still incentivized by the carry trade, borrowing cheap yen to buy higher-yielding dollar assets.

The interest-rate gap between Japan and the US remains significant, with Japan's rates far below those in the US. This encourages the carry trade, making it likely that traders will rebuild yen shorts despite the intervention. A decisive break above ¥160 could reopen the resistance level around ¥163.70-¥164.

The upcoming July CPI report is expected to play a crucial role in determining the next move for the dollar-yen pair. A hotter reading, particularly core CPI of 0.3% or more, could strengthen expectations for a September Federal Reserve hike and push the dollar-yen through ¥160.