Fundamentals

The yen will gain further support if global stock markets weaken again and the banking crisis intensifies, but further central bank and government action should stem gains from current levels

There was frenetic and disorderly trading in New York on Monday as risk aversion increased sharply and the yen strengthened rapidly to highs near 100.20 against the dollar. The Japanese currency also advanced rapidly on the crosses before a partial correction as Wall Street rebounded from its worst levels on hopes for lower interest rates.

The Bank of Japan left interest rates at 0.50% following the latest policy meeting and maintained its economy assessment. There is a much increased risk of intervention by the Bank of Japan to curb rapid currency gains if instability continues and this will tend to curb aggressive yen buying with high volatility set to continue.

The yen lost some ground in Asia on Tuesday as a larger than expected 1.0% cut in Australian interest rate increased hopes that there would be more aggressive global central bank action to ease the market pressures. The yen weakened back towards 103 against the dollar and 140 against the Euro with volatility still intense and the yen then regained ground as European markets dipped.