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Yen Tumbles Most in Over Two Years After G-7 Announces Joint Intervention

The yen tumbled the most in more than two years against the dollar as the Group of Seven nations said they will jointly intervene in foreign-exchange markets for the first time in more than a decade.

Japan’s currency slumped against all its major counterparts as Finance Minister Yoshihiko Noda said his country started the effort and each nation would intervene when its market opened. G-7 finance ministers and central bank chiefs said after a call to discuss the impact of the March 11 earthquake today that they will “provide any needed cooperation.” Central banks in France, Germany, Italy and the U.K. said they took part. The Australian dollar rose and the Swiss franc weakened as a rally in stocks boosted demand for higher-yielding assets.

The G-7 statement “met everyone’s expectations -- it was what people wanted,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “The earthquake is considered one of the biggest in a few centuries and so other nations must help Japan. The yen should fall toward 83 as nations are unified to stop its advance.”

The yen slumped 3.2 percent to 81.42 per dollar as of 7:12 a.m. in New York after weakening as much 3.9 percent, the biggest one-day drop since Oct. 28, 2008, when markets were roiled by the global financial crisis. Japan’s currency surged to 76.25 yesterday, the highest level since World War II.

The yen declined 4 percent to 115.03 per euro. The dollar depreciated 0.8 percent to $1.4128 per euro.

Volatility

The franc dropped against all but one of its 16 most- actively traded peers. The Swiss currency depreciated 0.4 percent to 90.19 centimes per dollar.

“We note the Bundesbank, the Banque de France and the Bank of England released statements to say they are participating in co-ordinated intervention,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “The recent price action in yen against the dollar, euro and pound suggests official activity to stem yen strength.”

One-month implied volatility for the dollar-yen rate fell 16 percent to 14.16, following a 19 percent jump yesterday. Volatility was 8.50 on March 10. One-month euro-yen volatility dropped 12 percent to 15.25, from 10 on March 10. Implied volatility is a measure of expected price swings and the key gauge for option prices.

Pressure to ‘Unwind’

“In response to recent movements in the exchange rate of the yen associated with the tragic events in Japan, and at the request of the Japanese authorities, the authorities of the U.S., the U.K., Canada, and the European Central Bank will join with Japan, on March 18, 2011, in concerted intervention in exchange markets,” the G-7 said today in the statement.

The combined yen sales are an attempt to limit the damage a strong Japanese currency will have on the nation’s economy in the aftermath of the magnitude 9.0 earthquake. G-7 nations may also conduct euro-yen intervention in addition to dollar-yen intervention, Noda said.

“You couldn’t expect anything stronger than what the statement contains,” said Koji Fukaya, chief currency strategist at Credit Suisse Group AG in Tokyo. “Investors will be forced to unwind long positions on the yen.” A long position is a bet that an asset will rise.

Radiation Risks

G-7 members hadn’t entered the market together since September 2000, when they sought to buoy the euro as it tumbled in its second year of existence.

“People had been talking about the possibility of co- ordinated intervention, but this is slightly more aggressive than people thought,” said Geoff Kendrick, head of European foreign-exchange strategy at Nomura International Plc in London. “Past co-ordinated central bank action tells you that you shouldn’t fight what they’re trying to achieve.”

Japan unilaterally sold more than 2 trillion yen ($24.4 billion) in foreign-exchange markets in September to stem gains, its first intervention since 2004. The Bank of Japan today added 4 trillion yen to the financial system, bringing its emergency fund injections this week to 38 trillion yen.

The yen soared 4.5 percent in 26 minutes yesterday as markets closed in New York and re-opened in Asia amid speculation automated trades to limit losses were taking place.

Japan said there’s no evidence insurance companies were repatriating assets from abroad due to the risk of radiation leaks from a quake-crippled nuclear plant north of Tokyo.

Downtrend ‘Uncertain’

“Intervention is certainly a powerful emergency response and makes it hard for the yen to rise, if it’s really done internationally,” said Daisaku Ueno, Tokyo-based president of Gaitame.com Research Institute Ltd., a unit of Japan’s largest online currency broker. “Yet it remains uncertain whether the yen will switch to a downtrend from here, because we don’t know what will happen to the nuclear plant’s problem.”

Power may be restored to one of the reactors at the Fukushima Dai-Ichi power plant today, Tokyo Electric Power Co. said, improving the odds that workers can prevent a meltdown and further radiation leaks.

The G-7 nations’ plan to jointly intervene in foreign- exchange markets is aimed at stopping the yen from appreciating rather than weakening the currency, according to Societe Generale SA.

“They’ve stopped the yen rise but are careful to say they don’t want to weaken it,”Kit Juckes, head of foreign-exchange research in London, wrote today in an e-mailed note. There’s still a risk that the yen will appreciate to 75 per dollar within a month because “there are still people with yen to buy,” he said.

‘Hope and Fear’

The yen reached its previous postwar high of 79.75 per dollar in April 1995, three months after a magnitude 6.9 quake struck the city of Kobe. Japan sold a total of 1.8 trillion yen in February and March that year as the yen rose 10 percent.

The Nikkei 225 (NKY) Stock Average rallied as much as 3.5 percent today, and the Topix index advanced as much as 2.8 percent.

“Investors are swinging between hope and fear,” said Masahide Tanaka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest bank. Risk aversion has eased after seeing some developments at the nuclear plant in addition to the G-7’s decision. Stocks are trading higher and the Aussie and kiwi are being bought.”

The Australian dollar rose 1.1 percent to 99.08 U.S. cents, paring the week’s drop to 2.3 percent. The so-called Aussie jumped 4.4 percent to 80.71 yen. The New Zealand dollar rose 1.3 percent to 72.74 U.S. cents, and added 4.6 percent to 59.27 yen.

To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net.

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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