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Currency market in turmoil as inflation wreaks havoc around the world: Bank of Japan moves to support yen against rampant dollar
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Financial markets fluctuated wildly yesterday as central banks around the world struggled to find a path through soaring inflation and a rampant dollar.
Interest rates have been raised from London and Washington to Zurich and Stockholm to contain rising prices – with US aggression pushing the dollar soar.
That led to a rare intervention by the Bank of Japan in foreign exchange markets yesterday – the first since 1998 – when it intervened to buy up the battered yen.
Crisis: The Bank of Japan intervened to buy up the battered yen after the US Federal Reserve raised interest rates by three-quarters of a percentage point for the third time in a row
The move came after the US Federal Reserve raised interest rates by three-quarters of a percentage point for the third meeting in a row this week, signaling more to come.
Hours later, the Bank of Japan dropped its key interest rate below zero, and the yen fell to its 24-year low against the dollar.
That pushed Japan to back its currency by using its dollar reserves to buy the yen, pushing the crunching currency up more than 2 percent.
Prime Minister Fumio Kishida said the government will “take necessary steps to respond to excessive fluctuations,” but experts have expressed doubts about the strategy.
It was the latest example of the pressure being exerted on the financial world by the frenzy of the dollar.
The yen has fallen 19 percent against the dollar this year, while the pound plunged 17 percent and the euro plunged 13 percent.
Yesterday sterling – already close to its 37-year low – was back on the rack. It plunged below $1.13 after the Bank of England raised its key interest rate by 0.5 percentage points. British bonds, meanwhile, suffered their biggest sell-off since March 2020.
Falling demand for bonds – government debt parcels – is driving up the returns sought by investors and making public sector borrowing more expensive.
Equity markets also endured a volatile session, with the FTSE 100 in London moving sharply higher, closing 1.1 percent lower. Paris and Frankfurt fell by almost 2 percent. A super strong dollar is causing serious imbalances for the global economy.
Commodities such as oil that are priced in dollars become more expensive and countries with dollar-denominated debt find it more difficult to maintain them.
But intervention in markets is controversial and earlier this year US Treasury Secretary Janet Yellen said it was only justified in “rare and exceptional circumstances”.
Deutsche Bank analysts questioned Japan’s strategy, saying the reserves needed “could become unaffordable very quickly.”
In Britain, the Bank of England notoriously intervened to defend the pound during an ugly sell-off of the currency in 1992.
Seven years earlier, there was concerted action to weaken the super strong dollar. There has been no repeat of that deal, known as the Plaza Accord.
Jane Foley, head of FX strategy at Rabobank, said such an agreement was unlikely until the Fed is confident inflation is under control. “However, whether we need one is completely different,” she added.