The US Treasury’s line of defense has been breached again, and yen weakness continues. Volatility in long-term US Treasury yields and hawkish signals from the Fed are reviving market concerns about monetary tightening.
The dollar-yen exchange rate reached ¥160.04 to the dollar in trading on the 28th, breaching the line of defense again despite intervention by Japanese and US finance authorities. The approximately $170 billion deployed by the Japanese government this year was also unable to reverse the trend.
The US Treasury raised the cap on long-term Treasury buybacks to at least $4 billion per operation, but the 30-year yield topped 5.27%. The stated aim was to prevent a domino effect of US Treasury selling intended to curb yen weakness.
Federal Reserve Chair Warsh issued his first strong tightening signal since taking office and suggested that action would be based on the state of inflation indicators. The probability of a September FOMC rate hike rose in the market, with expectations spreading that a hike of around 0.25% was likely.
Market participants pointed to a narrowing US-Japan interest rate differential and fiscal deficit restraint as factors related to a reversal in yen weakness. Some said that trends in the yen and long-term interest rates could spread to the global economy and emerging markets.