Yen Heads Toward Biggest Weekly Decline Since May as Gov't Warnings Fail to Halt Slide

The Japanese yen is heading toward its steepest weekly decline since May after falling to its weakest level against the US dollar in four decades, despite renewed government pledges to support the currency.

Market analysts said official warnings have failed to reverse the yen’s downward trend, arguing that any direct intervention in foreign exchange markets would likely provide only temporary relief unless the Bank of Japan moves more aggressively to raise interest rates.

The US Treasury Department said on Thursday that excessive volatility in foreign exchange markets was undesirable and called on the Bank of Japan to continue its path toward higher interest rates.

The yen’s decline has placed the dollar on track for weekly gains of around 0.88%, its strongest performance since May.

Christian Antoniez, a fixed-income and currency market analyst at Lazard Asset Management, said the underlying trend remains unfavorable for the Japanese currency, noting that market intervention may “buy time but does not change the direction” of the yen.

Investors have continued to monitor Japan’s policy response as the widening gap between US and Japanese interest rates remains a major factor weighing on the currency.

The US dollar has benefited from renewed inflation concerns following escalating tensions in the Middle East and a sharp rise in global oil prices.

Crude oil prices moved above $100 per barrel this week for the first time in nearly two months, increasing concerns over renewed inflationary pressures and strengthening expectations that US monetary policy may remain restrictive.

Federal Reserve Governor Kevin Warsh reiterated the central bank’s commitment to bringing inflation back toward its 2% target, adding to market expectations that policymakers will continue to prioritize price stability.

Macrae Sykes, portfolio manager at Gabelli, said US inflation data for June was encouraging but not sufficient to determine the future path of price pressures.

Currency markets are also focused on upcoming decisions from major central banks.

The euro gained 0.1% to reach $1.1388 after the European Central Bank kept interest rates unchanged while maintaining the possibility of a rate increase in September.

Markets are currently pricing in approximately a 29.9% probability of an ECB rate hike in September.

Meanwhile, the Swiss franc remained stable against the dollar after the Swiss National Bank reaffirmed that it does not manipulate the currency’s exchange rate.