What the market is saying about the U.S. intervention to prop up the yen

U.S. support for Japanese efforts to bolster the country's struggling currency has offered a sharp bounce for the yen in recent sessions, strengthening some 5% before paring gains on Monday. The coordinated intervention has lifted the yen to 157 to the dollar, down from just above 163, which represented its lowest level in four decades. But analysts see little hope for a sustained rally in the battered currency as its fundamentals remain under the spotlight. "Japan's policy mix remains unlikely to generate sustained yen strength," wrote UBS strategists Teck Leng Tan and Dominic Schnider on Monday. "With the BoJ expected to continue gradual policy normalization and real rates remaining negative, the yen should continue to be supported more by intervention risk than by domestic monetary fundamentals." Selling dollars — or euros? Previous Japanese efforts to prop up the currency in 2022 and 2024 saw the BoJ sell dollars to buy the yen. While it is understood to have followed the same approach this time around, reports suggest the U.S. Treasury may have sold euros to buy yen instead. In any case, the greenback's reaction on Monday has been modest. ING markets head Chris Turner said the dollar's resilience "probably owes to the unresolved issue of whether the Federal Reserve will hike in September." The specter of higher interest rates means the potential for higher yields, which boosts international demand for Treasurys. HSBC added that a structural shift in the Bank of Japan's underlying policies will be key to any sustained rally in the currency. "Unless we see much faster BoJ rate hikes, and the government taking a clearer stand on the JPY – rather than saying that JPY weakness has both positive and negative implications – as well as dialling back its ambition for fiscal expansion, we still lack confidence in projecting a downtrend for USD-JPY," the analysts wrote in a Monday note. Could the intervention backfire? Robin Brooks, a senior fellow at the Peterson Institute for International Economics, wrote in a Substack post that the coordinated intervention could ultimately weaken rather than strengthen confidence in the yen. If Washington sold euros instead of dollars to buy yen, investors may infer U.S. officials were trying to spare Japan from selling U.S. Treasuries to finance intervention, he added. Reports that the U.S. sold euros rather than dollars to buy yen surprised markets because coordinated intervention has traditionally been funded with dollar assets. "This kind of twist in my opinion undercuts the efficacy of U.S. participation, because it invariably will have markets wondering why the US didn't just fund Yen buying out of Dollars," said Brooks. — CNBC's Ying Shan Lee also contributed to this report.