By Ankur Banerjee and Yena Park
SINGAPORE, July 31 (Reuters) – Japan and South Korea have stepped in to buy their currencies, possibly with involvement from the United States, in a rare coordinated intervention, sources and analysts said.
The intervention gave the yen its biggest boost in almost two years and, if the past is any guide, any joint effort with the U.S. may prove strong enough to turn around the battered currency.
Japan conducted yen-buying, dollar-selling intervention in New York hours on Thursday, a market source told Reuters. A separate source said that South Korea’s foreign exchange authorities were selling dollars alongside Japan.
The Nikkei newspaper reported earlier on Friday that U.S. authorities conducted rate checks during the session, raising the possibility that the U.S. was part of the operation.
Such checks involve the monetary authority asking banks at what rate they would sell a currency, often a precursor to intervention.
Reuters could not confirm if the U.S. authorities made rate checks.
The New York Federal Reserve, which in January conducted similar checks, declined to comment.
“We are receiving support from the United States that goes beyond psychological support, and I’m constantly in contact with relevant authorities,” Japan’s top currency diplomat Atsushi Mimura said when asked about the possibility of coordinated intervention with the United States.
The intervention lifted the yen late on Thursday away from the 40-year lows it has been hovering around this week although the currency handed some of that back on Friday as the Bank of Japan held interest rates steady as expected.
The move in the yen overnight came around the same time as the Korean won firmed 2% to its highest in nine months.
“The interests of each country aligned. For Korea-Japan cooperation, the won and the yen are so tightly coupled that a joint intervention could double the impact,” said Lee Min-hyuk, an analyst at KB Kookmin Bank.
“From the U.S. perspective, Korea and Japan need to invest in America. Since the exchange rate has been exceptionally high recently, the U.S. likely wanted our exchange rate to come down as well.”
Japan has intervened in currency markets in coordination with the U.S. or other G7 partners five times since 1985, and eight times on its own, according to an analysis by currency strategist and trader Brent Donnelly at Spectra Markets.
Most of the joint interventions coincided with a turn in the direction of the dollar/yen pair, his analysis shows.
YEN BEARS ASSEMBLE
Analysts worry that interventions are unlikely to help the frail yen unless the central bank follows through with rate hikes, especially with speculators amassing a large bearish bets on the yen, now worth $11.65 billion.
The yen was last at 160.41 per U.S. dollar, 0.5% softer on the day after strengthening to as much as 157.8 in the previous session, raising the stakes for the BOJ as investors worry that interest rate hikes may not come fast enough.
The central bank kept interest rates steady at 1%, a 31-year high, on Friday but warned for the first time that underlying inflation could exceed its target, signalling rate hikes could be on the cards.
Japan’s Prime Minister, Sanae Takaichi, is an advocate of low rates and raising government spending to drive growth, a platform that’s also raised market sensitivity to inflation risks and put some pressure on the yen in recent months.
Board member Hajime Takata was the sole dissenter to the policy decision, calling for a rate hike to 1.25% to respond to inflationary risks from external demand shocks.
“I think only one dissent vote suggests that there’s not yet widespread views among the BOJ officials that (a hike) is necessary,” said Naka Matsuzawa, chief macro strategist at Nomura Securities in Tokyo.
“It was a kind of golden opportunity for Japanese authorities, if they really wanted to change the course of the yen, now that the Fed looks fragile and hike expectations taper out at the Fed,” he added.
“But bottom line, I guess Takaichi herself is not ready for it.”
WON PATROL
The won, which hit a 17-year low of 1,561.50 last month, was last nearly 1% weaker at 1,437.62 per U.S. dollar on Friday. It has gained nearly 8% this month on the back of firms repatriating dollars back into South Korea.
SK Hynix raised $26.5 billion in a U.S. offering earlier this month with a source familiar with the matter telling Reuters the firm converted a part of the funds it raised in its American depositary receipts (ADRs) offering into won.
“People were questioning whether the exchange rate would rebound once the ADR ended,” said KB Kookmin Bank’s Lee.
“As the ADR concluded and Japan intervened to support the Yen, our authorities probably used this opportunity to push the rate down and break the market’s high exchange rate expectations.”
(Reporting by Yena Park, Cynthia Kim and Jihoon Lee in Seoul; Leika Kihara, Takaya Yamaguchi and Makiko Yamaguch in Tokyo, Tom Westbrook and Ankur Banerjee in Singapore, Writing by Ankur Banerjee in Singapore; Editing by Raju Gopalakrishnan)
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