Yen under pressure as dollar holds firm, options market signals more pain ahead

The Japanese yen fell 0.6% to 162.31 per dollar on Monday, almost erasing gains that followed softer than expected US payrolls data last week. One year options sentiment briefly moved in favour of the dollar for the first time in more than three years, pointing to renewed conviction that the yen will stay under pressure over the longer term.

Japanese authorities stay on sidelines, yen selling resumes

Traders had paid up to hedge against sharp yen moves before the US holiday, when thin liquidity was seen increasing the risk of market intervention to support the currency. But with Japanese officials staying on the sidelines, the yen faced a fresh round of selling.

“The dollar seems to have dodged the bullet of large scale Japanese FX intervention, after a no show from the Bank of Japan in holiday thinned conditions last week,” said Chris Turner, head of foreign exchange strategy at ING Bank NV. He said that is a reminder that Tokyo wants to use its currency reserves cautiously, adding that the next window for intervention could be July 16-17, ahead of the next public holiday in Japan.

Short term hedging eases but long term bets shift

The risk of action by the Japanese authorities remains embedded in short dated options, though it has eased from recent extremes. One week risk reversals trade around 248 basis points against the dollar, reflecting demand for protection against short term yen strengthening. That compares with a May peak of 316 basis points.

But while the front end still reflects intervention hedging, one year risk reversals briefly favoured dollar calls for the first time since late 2022. The spread between the two tenors has widened to more than 250 basis points, a level rarely seen in data going back to 2008. Similar extreme readings have historically clustered around intervention type episodes.

Goldman Sachs revises forecast higher

Goldman Sachs Group Inc. strategists revised their dollar yen forecast higher to 165 in a year’s time, from 155 previously. They see upward pressure persisting without an unexpected negative US growth shock or BOJ pivot toward more aggressive policy tightening.

Money markets price about 30 basis points of Federal Reserve rate increases by year end and 23 basis points from the Bank of Japan, suggesting interest rate differentials will continue to offer little support for the Japanese currency.

According to Tatsuo Yamasaki, a former top foreign exchange official in Japan, the yen should be as much as 20% stronger than it is. “This isn’t about fundamentals anymore — it’s about how people’s expectations have shifted,” he said.

For Nigerian businesses and importers who rely on the dollar, a persistently weak yen means continued pressure on global currency markets. The dollar’s strength against the yen reinforces the greenback’s broader dominance, which keeps the naira under strain as demand for dollars remains high across emerging markets.