Yen Falls From 4-Month High as China Steps In to Soothe Market

  • Technical measure shows overextension, scope for decline
  • Currency surged 2.8% versus dollar last week, most since 2013

The yen weakened from a four-month high as demand for haven investments ebbed after China stepped up its defense of the yuan.

Japan’s currency fell as technical analysis suggests the currency strength was overextended. The dollar gained versus the majority of its 16 most-traded counterparts, as declines in crude oil and commodities dimmed the allure of currencies from nations that export natural resources.

The People’s Bank of China repeatedly intervened to buy the yuan in the offshore market on Tuesday, according to people familiar with the matter. The yen, considered among the safest currencies partly due to Japan’s current account surplus, has strengthened this year amid concern China’s financial turmoil will spill into other economies.

"We’ve seen risk appetite improving somewhat -- markets may have become a little overextended in terms of broad-based negativity," said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. "Assuming U.S. data holds up, we should remember the monetary policy divergence still favors the dollar. Accordingly, we’re seeing the dollar making some modest gains."

Japan’s currency was little changed at 117.81 per dollar as of 12:01 p.m. in New York. It reached 116.70 Monday, the strongest level since Aug. 24. The U.S. currency rose 0.3 percent to $1.0831 versus the euro.

Yen Path

The 14-day relative-strength index of the currency pair was below 30 for a fifth day, a signal to some traders that the yen is set to weaken after surging last week by the most since August 2013. A gauge of global currency volatility was at a three-month high.

The yen jumped 2.8 percent last week versus the dollar, the most since August 2013, as China’s eight-day run of reductions to the yuan’s reference rate spooked financial markets. The PBOC kept the yuan’s reference rate stable for the third day Tuesday in a bid to reassure investors.

“The effort by China to stabilize the market may help to ease concern and reduce demand for haven currencies,” said Jane Foley, a senior currency strategist at Rabobank International in London. “But I doubt if anyone would be surprised if China-led tension did return. The issue for China is that its artificial support has become part of the problem.”

Crude oil futures fell to $30.29 a barrel in New York, reaching the lowest level since 2003. The Bloomberg Commodity Index dropped to its weakest level since at least 1991.

"More people are calling for sub-$30 oil -- the negative sentiment feeds on itself," said Mazen Issa, senior foreign-exchange strategist at Toronto-Dominion Bank in New York.

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