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The Yen Is Now Resurgent Even as Broad Dollar Strength Persists

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·3-min read
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(Bloomberg) -- The yen’s two-month freefall looks to be over as slowing growth in China and expected damage to the US economy from Federal Reserve rate hikes bolster its haven credentials, strategists say.

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The currency jumped 1.3% to 128.34 per dollar Thursday, extending its rebound after last week plummeting to 131.35 against the greenback, its weakest level in around two decades. The move came even as the U.S. currency soared against most peers in haven-inspired trading.

Declines in Treasury yields in recent days have helped weigh on the dollar against the Japanese currency, even if not against other counterparts, while the yen’s haven status appears to also be reasserting itself to some degree as US stocks take a beating. All that adds up to a notable recovery for the yen, which has been among the most battered currencies this year.

Australia & New Zealand Banking Group Ltd. said it sees the yen recovering as the swoon in US stocks sends Treasury yields lower, removing a major driver of dollar strength. Barclays Securities Japan Ltd. meanwhile says the one-way decline in the yen is over, while Shinkin Asset Management Co. reckons the currency could come back to around 125 per dollar.

“Market sentiment has changed since the Dow broke a key chart point that held it in an elevated range despite aggressive Fed rate hikes,” said Hiroyuki Machida, director of Japan foreign-exchange and commodities sales at ANZ in Tokyo. “An adjustment in risk assets has finally taken place and that is fueling yen buying as the market shifts to a risk-off trend.”

The yen’s outlook is improving due to global-growth negatives including the “Ukraine situation, the impact on the US economy from aggressive rate hikes and Chinese lockdowns,” said Jun Kato, chief market analyst at Shinkin Asset Management in Tokyo. “Shrinking liquidity as central banks turn hawkish may also spur flight-to-quality buying to help cap US yields.”

There seems little reason to push Treasury 10-year yields back above 3% as that level reflects markets fully pricing in the Fed’s policy outlook, Kato said. The yen is likely to trade in a range of 128 to 133 per dollar for now before markets decide the next direction, which may include it appreciating to test 125, he said.

The yen has plenty of room to recover. The currency is still down more than 10% versus the dollar this year as the Bank of Japan has stuck to a dovish tone even as other major central banks have tightened policy. The yen has also suffered as rising commodity prices have damaged the outlook for Japan’s resource-importing economy.

It traded around the 128.60 level in early Tokyo trading Friday.

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The prospect of the yen weakening to 135 per dollar that was seen as probable just a week ago now seems much more unlikely, said Shinichiro Kadota, a foreign-exchange strategist at Barclays Securities Japan in Tokyo.

“The one-way upward path in dollar-yen looks to be turning around as markets may no longer be aggressively pricing in successive rate hikes due to the concerns about the impact of China’s growth slowdown,” he said.

(Updates levels in second and ninth paragraphs.)

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