Yen’s Decline Continues Amid Global Yield Hunt

The Japanese yen has experienced a notable decline, reaching new lows against the euro, sterling, and other currencies, marking its fourth consecutive week of depreciation against the dollar. This trend highlights investors’ pursuit of higher returns outside Japan, with expectations that Japanese interest rates will remain close to zero for the foreseeable future.

This year, the yen has become the G10’s weakest currency, falling 6.4 percent against the dollar, which has emerged as the strongest. Over the week, the yen weakened by 0.6 percent against the euro, dropping to a three-month low at 163.45 per euro. It also depreciated by the same margin against sterling, reaching its lowest level since late 2015 at 190.83, and hit a nine-year low against the Australian and New Zealand dollars.

The yen’s movements against the dollar have been relatively modest, partly due to concerns that its continued slide could trigger market interventions by Japan, with officials signaling their readiness to act against rapid, speculative declines.

Investors have been engaging in carry trades, borrowing yen at nearly zero percent interest and investing in assets denominated in other currencies that yield higher returns. This strategy has been facilitated by the collapse of Deutsche Bank’s foreign exchange volatility index to two-year lows and the recalibration of market expectations regarding rate cuts in the U.S., Europe, and Britain, which has kept yields elevated.

Despite the recent data showing an unexpected dip into recession in Japan, the focus remains on carry trades in a range-bound market environment. The difference in yield between Japanese and U.S. government bonds at the two-year tenor exceeds 450 basis points, with data indicating a significant increase in yen short positions last week.

The appeal of higher-yielding currencies has boosted the Australian and New Zealand dollars, with the latter surpassing 62 cents and the former achieving a 0.5 percent weekly gain, its largest in two months. Meanwhile, the euro is on track for its biggest gain in two months, bolstered by a reduction in the expected scale of interest rate cuts this year.

This currency trend underscores a global search for yield among investors, with the yen’s depreciation reflecting broader market dynamics and monetary policy expectations.