The Bank of Japan's Rate Hike Fails to Halt Yen's Decline, Approaching a 40-Year Low

June 19 (Reuters) – The yen remains locked near a nearly 40-year low against the U.S. dollar, even after the Bank of Japan (BOJ) raised interest rates to a 31-year high last week and Japan’s Ministry of Finance (MOF) intervened multiple times in currency markets so far this year. On Friday, the dollar traded at ¥161.12, not far from the two-year peak hit earlier in the day. Newly appointed Federal Reserve Chair Kevin Warsh’s persistent hawkish policy tone is keeping the dollar elevated, while Japan’s core inflation has stayed below the BOJ’s 2% target for four straight months—weakening bets on further rate hikes from the Japanese central bank. At the same time, Japanese Prime Minister Taro Aso’s fiscal spending plan has stirred market concerns about the country’s fiscal outlook. DBS Bank noted that following the BOJ’s rate hike this week, short yen positions in the market haven’t been meaningfully unwound, and Japan’s tolerance for additional yen depreciation is almost at its breaking point. The market expects the MOF will intervene in the exchange rate again if the dollar-yen rate approaches the 161.95 level. Meanwhile, CME FedWatch data shows the probability of a 25 basis point rate increase from the Federal Reserve in July has risen to 38.5%—a sharp jump from 8% just one week ago—further reinforcing expectations of a strong U.S. dollar.