Dollar defies another suspected intervention from Japan

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By Amanda Cooper

LONDON (Reuters) - A blast of suspected intervention by the Bank of Japan (BOJ) on Monday to shore up the yen did little to tame the strength of the dollar, while the pound rose as former finance minister Rishi Sunak emerged as frontrunner to become Britain's prime minister.

The yen hit a low of 149.70 per dollar overnight before being swept to a high of 145.28 within minutes in a move that suggested the BOJ, acting for Japan's Ministry of Finance (MOF), had stepped in for a second successive day. The yen was last at 149.22, down nearly 1% on the day against the greenback.

"The price action should be worrying for the MOF, as it suggests that there is strong demand to buy into dollar/yen dips," said Sean Callow, a senior currency strategist at Westpac in Sydney.

"The timing should have been good for intervention, with U.S. yields still falling in the wake of the WSJ Fed story Friday."

Yen overnight volatility surged to its highest since Sept. 21, the day before the BOJ stepped in to prop up the currency for the first time since 1998.

European stocks rallied, while bond yields fell, extending gains from Friday when the Wall Street Journal reported Federal Reserve officials will likely debate the size of future hikes, fuelling hopes that a Fed pivot might be near.

Japan had also intervened in the foreign exchange market on Friday, buying yen in the second confirmed instance in a month after the currency hit a 32-year low near 152 to the dollar, policy sources said.

That triggered a rally of more than 7 yen for the Japanese currency to 144.50 per dollar.

Traders also suspect the BOJ has intervened more than once in the past month to shore up a currency that has tumbled 22% this year against the dollar.

Referring to how Japan had a classic open economy 'trilemma' forcing it to intervene in both bond and currency markets concurrently, Goldman analysts said: "While sub-optimal and unsustainable in the medium term, we think this policy mix could be in place for some time."

The U.S. dollar also made gains against other major currencies, with the euro down 0.3% at $0.9829.

Sterling see-sawed on news former prime minister Boris Johnson had dropped out of running for British prime minister and was last up 0.1% at $1.1323, off an overnight high above $1.14.

Johnson said he has withdrawn from Monday's contest to replace Liz Truss, who was forced to resign after launching a fiscal plan that unleashed turmoil in UK markets.

Former Chancellor Rishi Sunak has emerged as the clear frontrunner to become Britain's next prime minister.

"Sterling price action seems to assume the advent of a Sunak/Hunt ticket as PM/Chancellor and a focus on trying to restore some of the UK's lost fiscal credibility," ING strategist Chris Turner said.

"After the failed experiment with Trussonomics, the challenge facing the new team will be harder than the one that existed earlier this summer and probably a reason why international investors will not want to chase GBP/USD above the 1.15 level. FX volatility does remain exceptionally elevated, however, and large swings cannot be ruled out," he added.