Japan stepped in to strengthen the yen for the first time in 24 years when three European central banks raised interest rates, underlining the disruptive impact of inflation on currencies and monetary policy.
Rising inflation to the highest levels for several decades across much of the world has led to sharp increases in borrowing costs, with currency markets rocketing. This in turn has triggered what economists call a “reverse currency war” in which central banks try to support their exchange rates against the dollar, through interventions or increases in interest rates.
The latest moves, which included rate hikes in the UK, Switzerland and Norway, came the day after the US Federal Reserve pushed the dollar higher by announcing its third consecutive rate hike of 0.75 percentage points on Wednesday.
However, the Turkish central bank has moved in the opposite direction, continuing its unorthodox policy by cutting its one-week repo rate from 13% to 12% despite inflation rising over 80% last month. The lira fell to an all-time low against the dollar.
While investors are betting that the Fed and other major central banks will raise rates more than previously expected to keep inflation in check, U.S. bond yields have risen, boosting the dollar and putting downward pressure on other major currencies including yen, pound and euro.
“The Fed is really setting the pace for interest rate hikes and putting pressure on other central banks through currency markets,” said Krishna Guha, head of central bank policy and strategy at US investment bank Evercore.
The yen lost about a fifth of its value against the dollar this year, raising the price of imports and contributing to an eight-year high in Japan’s core consumer price growth, which excludes food price volatility, at 2. , 8 percent in the year to August.
Masato Kanda, Japan’s top currency official, said Thursday that Tokyo had “taken decisive action” to address what it felt was a “swift and one-sided” move in the foreign exchange market. It was the first time Japan had been selling dollars since 1998, according to official figures.
The move sent the yen up to ¥ 142.39 per dollar within minutes. On the currency’s most volatile day since 2016, it previously hit a low of ¥ 145.89 after the Bank of Japan signaled it would not change its forward-looking interest rate guidance and adhered to its ultra-accommodative policy.
Citigroup economist Kiichi Murashima said that even if the BoJ were to refine its policy, it would not fundamentally change the broader picture of a growing gap in financial conditions between Japan and the rest of the world. “It is highly questionable to what extent the government can actually prevent the yen from falling against the dollar,” he said.
There have been similar concerns in South Korea over this year’s 15% drop in the value of the won against the dollar, sparking speculation about a potential currency swap deal with the Fed, which Seoul denied on Wednesday.
Japan is now the only country in the world to maintain negative rates after the Swiss National Bank raised its policy rate by 0.75 percentage points on Thursday, taking it into positive territory and ending Europe’s 10-year experiment with rates. below zero.
On Thursday, the Bank of England resisted pressure to adjust to the pace set by the other major central banks, raising the benchmark rate by 0.5 percentage points to 2.25% and continuing with the sale of assets accumulated under the previous quantitative easing schemes.
But he also left the way open to take more aggressive action in November, when he updates his economic forecasts and assesses the impact of the tax cuts that will be unveiled on Friday by the new administration of British Prime Minister Liz Truss.
Norway’s central bank also raised rates by 0.5 percentage points, indicating that smaller hikes would follow until early next year. Pictet Wealth Management estimated central banks around the world raised policy rates by a total of 6 percentage points this week.
Emerging and developing economies are particularly vulnerable in what the World Bank chief economist has described as the most significant tightening of global monetary and fiscal policy in the past five decades.
In an interview with the Financial Times, Indermit Gill warned that many low-income countries could go into debt crises.
“If you look at the situation in these countries before the global financial crisis and now, they are much weaker,” he said. “If you get weak, you usually get weaker.”
Rising interest rates triggered strong sell-offs in the government bond markets. Yields on 10-year US Treasuries, a key metric for the cost of global financing, increased by 0.18 percentage points to 3.69%, the highest since 2011. The 10-year bond yield of the United States Brittany rose by a similar margin of 3.5%.
Bond market volatility also spread to equities, with the European Stoxx 600 down 1.8%. Wall Street’s S&P 500 fell 0.8% at lunchtime, leaving it on track for its third consecutive decline as traders are betting on further strong rate hikes from the Fed.