By Hannah Lang
NEW YORK (Reuters) – The yen fell on Wednesday after an influential Bank of Japan official downplayed the risk of an interest rate hike in the near term, calming investor concerns that further gains in the Japanese currency could rattle global markets again.
The yen fell about 2.5% to a session low of 147.94 per dollar after comments from BOJ Vice Chairman Shinichi Uchida. The dollar was last up 1.74% at 146.850 yen.
“As we see high volatility in domestic and foreign financial markets, it is necessary to maintain the current level of monetary policy easing for now,” Uchida said.
His remarks, which contrasted with hawkish comments by Gov. Kazuo Ueda last week when the Bank of Japan unexpectedly raised interest rates, sent Japanese shares higher and they were flat for the week.
The BoJ’s interest rate hike last week and Tokyo’s intervention in early July have prompted investors to pull out of once-popular carry trades, in which investors borrow yen at low interest rates to invest in assets offering higher yields.
The stock pullback, combined with frail U.S. jobs data and concerns about an artificial intelligence bubble, has led to a collapse in global stock markets this week, starting with a 12 percent drop in Japanese stocks on Monday.
“I think we’re still going through a bit of a rebound, which, at least thematically from a market perspective, was a bit of an overreaction,” said Marvin Loh, senior global macro strategist at State Street (NYSE:) in Boston.
The exchange rate, a measure of the currency’s value against six other currencies, rose 0.214% to 103.2, slightly above a seven-month low of 102.15 reached on Monday.
“The drama – the sturm und drang – of these kinds of stock market moves are great stories, but they don’t necessarily … signal a larger economic catastrophe. I just don’t see it,” said Joseph Trevisani, a senior analyst at FX Street in New York.
CARRY TRANSACTIONS
The yen’s decline was broad-based, with the Mexican peso, New Zealand dollar and Australian dollar – all candidates for carry trade investments – gaining against the yen.
The Swiss franc, another currency used to fund carry trades like the yen, fell about 1.18% to 0.862 per dollar.
The euro fell 0.09% to $1.092, below an eight-month high of $1.101 reached on Monday as the dollar fell. The pound fell 0.06% to $1.268.
Investors on Monday boosted their bets on interest rate cuts by the Federal Reserve following an unexpected rise in the unemployment rate on Friday, at one point pricing in more than 125 basis points of cuts this year.
Those bets have gradually lost ground, with investors on Wednesday expecting 100 basis points of monetary policy easing this year and a 62% chance of a 50 basis point cut in September, pricing that in as a near certainty on Monday.
“I think people are starting to say, hey, let’s look at what’s happening in the labor market in more and more detail and come to the conclusion that things aren’t falling apart in the United States very quickly,” said Stephen Miran, senior strategist at Hudson (NYSE:) Bay Capital.
Elsewhere, the Australian dollar fell 0.01% to $0.652, a day after the central bank ruled out cutting interest rates this year, saying core inflation would decline only slowly.
The index has struggled in recent days, falling to an eight-month low on Monday amid a global market meltdown, but recovered the following day after comments from the Bank of Japan.
The New Zealand dollar rose 0.63% to $0.599 on robust jobs data.
