Yen may shrug off Fed rhetoric and fall vs dollar

LONDON: Japan’s yen may be set to fall against the dollar despite a strong argument that rhetoric from the Federal Reserve could undermine the greenback against major and emerging currencies.
Fed Chairman Ben Bernanke called on Sunday for certain emerging economies to allow their currencies to rise. Yet his stance is not incompatible with toleration of Japanese action to weaken a yen that has been steadily rising against the greenback.
The Japanese government’s third successive monthly downgrade on Friday of the outlook for the local economy will only reinforce the view of Japan’s policymakers that further appreciation of the yen would be unhelpful.
“Our position is that recent yen appreciation is one-sided and doesn’t represent economic fundamentals,” Takehiko Nakao, Japan’s vice finance minister for international affairs, told reporters at the Foreign Press Center Japan on Oct 3.
“If there is a big movement in currencies we’ll take decisive action if needed, that is our stance,” he said.
Apparently the Group of Seven industrialized economies meeting in Tokyo recently had no objections regarding Japan’s concerns over the yen, a Japanese Ministry of Finance (MOF) official said.
Battle-hardened veterans of previous MOF-initiated interventions to weaken the yen will understand that the bare minimum for action is US forebearance and that can be inferred from the MOF official’s comment.
Such toleration is understandable.
If Bernanke gets his wish and emerging currencies do rise, the central banks of the economies concerned would presumably not intervene to buy so many dollars.
Less emerging economy central bank dollar buying means less demand for US Treasuries, and the US authorities would hope for someone to take up the slack.
Step forward Japan to recycle into US Treasuries any dollars purchased to stop further yen appreciation.
A problem solved at one stroke of the MOF’s pen.
Bernanke’s view that emerging currencies should firm against the dollar is therefore not at odds with the idea that US policymakers do not object to Japan’s view that the yen should not be allowed to strengthen further.
In fact the two notions may be mutually supportive.
Whatever happens to the greenback, dollar/yen should not fall and Japanese authorities may be far closer than the wider foreign exchange market believes to intervening to weaken the yen.
A rise in the dollar against the yen to 80 might be just a starter. A move to 85 in the next 12 months is not out of the question.
 
— Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own.