The yen slumped against all of its major counterparts after the Group of Seven nations intervened in foreign-exchange markets yesterday, paring gains earlier in the week as the nation copes with a deadly earthquake.
The Japanese currency fell the most in more than two years against the dollar, paring a weekly gain, after the Bank of Japan was joined by G-7 central banks in an effort to stabilize foreign exchange markets. The yen surged 4.5 percent in 26 minutes March 17 to a post-World War II high on concern Japanese investors would repatriate assets to pay for rebuilding after the March 11 tsunami and resulting nuclear power crisis. The euro rose against the dollar on speculation the European Central Bank will increase interest rates before the Federal Reserve.
“People were expecting intervention all week and finally they came in,” said David Mann, head of research for the Americas at Standard Chartered Bank, in an interview on Bloomberg Television’s “Street Smart” with Carol Massar and Matt Miller. “This is about limiting volatility and reducing uncertainty.”
The yen strengthened 1.5 percent to 80.58 per dollar, from 81.84 March 11. It fell 2.1 percent yesterday, its first drop in six days, and hit a record high of 76.25 the previous day.
The yen declined 0.5 percent to 114.31 per euro. The dollar depreciated 2 percent to $1.4182 per euro, from $1.3903.
The Japanese currency weakened yesterday as Fed and Bank of Canada action followed those of the Bank of Japan, the ECB, the Bank of England, the Bank of France, Germany’s Bundesbank and the Italian central bank. Japan’s authorities probably sold less than 2 trillion yen ($25 billion) in yesterday’s foreign-exchange market intervention, a Japanese government official told reporters in Tokyo.
The yen had appreciated 5.2 percent since the 9-magnitude earthquake and tsunami through March 17. Japan’s Finance Minister, Yoshihiko Noda, said the coordinated central bank interventions are an attempt to limit the damage a strong Japanese currency will have on the nation’s economy.
The BOJ added 4 trillion yen to Japan’s financial system yesterday, bringing its emergency fund injections this week to 38 trillion yen.
The euro gained against most of its major counterparts as European Central Bank President Jean-Claude Trichet indicated yesterday the bank still plans to raise interest rates next month.
“I have nothing to add, nothing to withdraw,” Trichet told reporters in Frankfurt when asked if policy makers are still in a posture of strong vigilance, ECB code words for an imminent rate increase. “No new message at all,” he said.
Trichet took investors by surprise earlier this month when he announced the ECB may raise its benchmark rate from a record low of 1 percent in April. Since Japan’s earthquake, investors had pared bets on higher ECB rates.
“The market in general had expected that what’s happening in Japan would lead to slower growth, and so maybe Europe would be more dovish,” said Douglas Borthwick, managing director and head of foreign-exchange trading at Stamford, Connecticut-based Faros Trading LLC. “This confirms that they have no interest in being dovish whatsoever.”
The U.S. central bank has kept its benchmark lending rate at zero to 0.25 percent since December 2008. The Fed will boost the rate by 25 basis points in the last three months of the year, according to the weighted average forecast of 68 analysts in a Bloomberg News survey.
The Swiss franc was the biggest gainer against the yen as concern unrest in the Middle East and North Africa would spread drove investors to seek haven assets. Bahrain declared a three-month state of emergency on March 15 as forces from neighboring Saudi Arabia arrived in the nation to support its government.
The Swiss currency added 1.7 percent to 89.49 yen. It advanced 3.1 percent to 90.10 centimes per dollar.
New Zealand’s dollar, Australia’s currency and the South African rand dropped the most against the yen as commodity prices slumped.
The kiwi dropped 3.1 percent to 58.90 yen, the Aussie slumped 3.3 percent to 80.24 yen and the rand weakened 3.2 percent to 11.52 yen.
The three nations are commodity exporters. The Thomson Reuters /Jefferies CRB Index of raw materials lost 0.2 percent.
The franc pared its gain and currencies of most commodity-exporting countries rose yesterday after Libya declared a cease-fire.
One-month implied volatility for the dollar-yen rate reached 20.1 percent March 17, the highest in two years. One-month euro-yen volatility dropped to 14.75 percent, from 17.25 percent. Implied volatility is a measure of expected price swings and the key gauge for option prices.
Implied volatility in the G-7 currencies, as measured by the JPMorgan Chase & Co. index, dropped 2.4 percent to 11.58. It reached a nine-month high of 14.13 on March 17.
“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 yesterday in the statement.
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.
Japan’s intervention was its first since September, when it acted on its own after the yen had climbed to 82.88, the strongest at that time since 1995. The BOJ sold 2 trillion yen in that effort, which was the first such move since 2004. Even after the move, the yen appreciated to a 15-year high Nov. 1, before weakening.
The yen has dropped 1.9 percent against a basket of currencies from 10 developed-world nations this year, while the dollar is down 2.6 percent, according to Bloomberg Correlation-Weighted Currency Indices. The euro has advanced 3.9 percent.