Eurizon Sees Dollar-Yen Peaking at 125 After Joint Intervention

Eurizon SLJ Capital believes the dollar has peaked against the yen after a joint US-Japan intervention, and sees the yen reaching 125 per dollar - a gain of more than 20% from current levels. The firm's logic is based on the 'dollar smile' theory created by Stephen Jen, which suggests that the dollar rises in times of global crises but falls during periods of economic stability.

The US and Japan spent around $87 billion buying yen on July 30-31, their first joint intervention since 1998. However, instead of supporting the yen, the dollar-yen exchange rate dropped from nearly 164 to 155.2, and is now trading near 159.3 - a loss of half its intervention gains.

According to Goldman Sachs data, Japanese investors bought foreign bonds at a strong pace through July, driven by high interest rates in the US compared to Japan. This has created a significant rate gap that keeps the yen carry trade alive, but also makes it vulnerable to a sudden unwind.