FX round-up: Yen intervention centre stage as G7 meets

The bullish three-week run-up of Japan's yen against the US dollar was interrupted on Friday as a marked divide in the currency policies governing the pair opened at the G7 meeting.

A senior US Treasury official warned Tokyo policymakers against an intervention to stall the USDJPY rally, which has hurt Japan's exporters and worsened the nation's economic slowdown.

The yen's strength did not justify Tokyo stepping in, the official said, responding to Japan's view that fiscal stimulus could be used to reinvigorate the global economy.

At 17:04 BST, the dollar was up 0.51% to 110.52 yen. It was also up against the Swiss franc, and the Canadian and Australian dollars. The dollar-index spot price rose 0.15% to $95.429.

The greenback, however, weakened against the euro, New Zealand dollar and South African rand.

The G7 group is meeting in Sendai, Japan, today and tomorrow with a view to formulating a strategy for heading-off a global recession, with markets alert to any price-sensitive chat.

"The forex market will be watched for any reference to currency wars and specifically for any sign that the US Treasury is repeating its recent complaints about potential currency manipulators. This would have direct relevance for Japan," said Rabobank.

IG market analyst Joshua Mahony said the dollar-index's break higher strongly suggested the US unit had turned a corner. At 17:04 BST, sterling was down 0.68% to $1.4512.

"With the Fed increasingly keen to raise rates in the summer, the June US jobs report is going to be crucial as a potential enabler for another hike," said Mahony.

He and other market insiders pointed to the Federal Open Market Committee's (FOMC) April minutes, which suggested a more hawkish stance on rates. Several Fed officials also jawboned their opinions this week and last, some of which fanned the flames of a possible June hike.

"The Fed is rattling its sabre and yields are set to move higher in coming quarters," said Danske Bank Markets in a note.

UniCredit Research economist Thomas Strobel said that as markets digested the hawkish FOMC shift, the dollar will likely stay firm in the near term.

"But, the re-adjustment of expectations towards a more normal tightening cycle is not enough to revive the 'divergence trade'," he said.

Meantime, sterling mostly consolidated Thursday's gains. It fell 0.74% to €1.2947, dropped 0.15% to 160.423 yen and eased 0.56% to 1.4395 Swiss francs. It was firmly down against the aussie, loonie, kiwi and rand after a heady run-up earlier this week.

Dovish remarks from the MPC's Gertjan Vlieghe and Kristin Forbes were also acting as a drag on the pound.

In an interview with the Belfast Telegraph, Forbes said if the slowdown in the UK economy was related to uncertainty around the 23 June Brexit referendum then those doubts should lift quite quickly if Britons choose to remain.

Nonetheless, and on a more cautious note, she observed that: "We don't have concrete evidence that some of the softening we are seeing now is all referendum-related and uncertainty related, and there is a chance other things are going on."

FXTM research analyst Lukman Otunuga noted this, a recent string of positive domestic data and the seemingly increasing number of data sets suggesting UK will remain in the EU.

"Sterling remains bearish and sensitivity could heighten ahead of the EU referendum vote," he said.

With Bank of England apparently not likely to lift rates anytime soon the UK currency could be poised to decline in the medium term, he said.