FOREX-Japanese yen rebounds from 18-month low against dollar

By Karen Brettell

NEW YORK, Jan 14 (Reuters) - The Japanese yen rebounded from an 18-month low against the dollar on Wednesday as Japanese officials warned of potential intervention to shore up the currency, while the U.S. currency was modestly weaker against the euro as traders continued to evaluate likely Federal Reserve policy.

The yen has tumbled on concerns about looser fiscal and monetary policy as speculation rises that Prime Minister Sanae Takaichi will call an early snap election, a move that could delay parliamentary approval of a bill that grants the government the right to issue deficit-covering bonds.

"Takaichi's plan to leverage her astonishingly high personal ratings in calling a snap election is translating into a rise in bets on reflation in the Japanese economy, more government spending, and higher yields," said Karl Schamotta, chief market strategist at Corpay in Toronto. "All of that is translating into downward pressure on the yen, which of course is being offset by intervention threats from authorities."

YEN WEAKNESS OVERDONE?

Japanese Finance Minister Satsuki Katayama issued another verbal warning on Wednesday, saying officials would take "appropriate action against excessive FX moves without excluding any options."

Some also see weakness in the yen as having moved too far.

Analysts at LMAX Group note that from a technical perspective, “there are signs of a meaningful top in place after the market put in a multi-year high in 2024.”

From a fundamental perspective, “speculative yen longs have been largely unwound, leaving room for fresh short positioning if USDJPY breaks higher through 160, though rising intervention warnings from Japanese officials add two-way risk,” they said in a report.

The yen JPY= strengthened 0.56% against the greenback to 158.27 per dollar. It earlier reached 159.45, the weakest since July 2024.

The dollar index =USD, which measures the greenback against a basket of currencies including the yen and the euro,
fell 0.2% to 98.99, with the euro EUR= up 0.12% at $1.1655.

FEDERAL RESERVE EXPECTED TO HOLD RATES

The dollar is struggling to continue a rally that began in late December as traders evaluate Federal Reserve policy against other crosswinds.

The U.S. central bank is expected to keep rates on hold for several months, which, along with rising geopolitical risks, is supportive of the currency.

Tehran has warned neighbors hosting U.S. troops that it would hit American bases if Washington strikes, a senior Iranian official told Reuters on Wednesday, as Iran seeks to deter U.S. President Donald Trump's threats to intervene on behalf of protesters.

Headwinds include concerns about Fed independence as the Justice Department undertakes a criminal investigation into Fed Chair Jerome Powell in relation to a building renovation.

However, "fears of a dilution in the Federal Reserve's independence have faded over the last few days in line with political pushback among Republicans, as well as a defense from central bankers themselves," said Schamotta.

Traders are waiting on a Supreme Court ruling on the legality of Trump’s emergency tariffs, which could come as soon as Wednesday.

Trump is expected to pursue alternative methods to enact the trade levies if the current ones are struck down, but it is unclear whether they would generate as much income or if the U.S. would be ordered to return levies that have already been collected.

The dollar was little changed on data on Wednesday showing that U.S. producer prices picked up slightly in November amid a surge in the cost of gasoline, while U.S. retail sales increased more than expected in November.

In cryptocurrencies, bitcoin BTC= gained 1.42% to $95,395.