Dollar-Yen Rises Above 160 Despite Record Intervention

The US Dollar to Japanese Yen (USD/JPY) exchange rate has rebounded above 160, despite record intervention by the US and Japan. This development reinforces UniCredit's warning that FX operations struggle when fundamentals resist them.

UniCredit analysts had previously questioned whether FX intervention could overcome the interest-rate gap, expansionary Japanese fiscal policy, and economic damage from high imported energy costs. They argued that it would be a waste of FX reserves if the USD is already strong due to factors outside of Japan's control.

The joint US-Japan intervention has spent a record ¥15.4tn (around $96.5bn) between 30 July and 26 August, yet the Dollar-Yen finished August back above 160. This outcome gives force to UniCredit's 'losing game' thesis that FX intervention may not be effective in the long run.

As noted in a recent Yen forecast, markets increasingly need the Bank of Japan to do part of the work itself, and a September rate increase could help to alleviate some of the pressure on the yen. However, without a credible path towards further tightening, another intervention may prove spectacular in the moment but frustratingly temporary afterwards.