The rebound of the yen is expected to "assist" the foreign exchange market! Citibank and Barclays both voiced their opinions: Asian currencies are likely to welcome a new round of appreciation.

According to analysis from Citigroup and Barclays, the recent rise in the yen is expected to boost several Asian currencies due to a high correlation between certain Asian currencies and the yen's movements. The strategists from both banks indicated in separate client reports that the Korean won, Singapore dollar, and Thai baht are the most likely beneficiaries of yen appreciation. Specifically, Rohit Garg and Gordon Goh, strategists at Citigroup in Singapore, wrote in a report released last Sunday: "Just as a weaker yen often leads to weaker Asian currencies, we believe the opposite should hold true as well. An appreciating yen will also have an impact in strengthening Asian currencies." Over the past week, the yen has rebounded as Japan and the U.S. intervened in the foreign exchange market to support the yen, which had previously fallen to its lowest level since the 1980s. As of Monday, the yen had risen more than 4% against the dollar over the past three trading days. During this period, the Korean won, Thai baht, and Philippine peso each appreciated by at least 0.7%, while a basket index tracking Asian currencies (excluding the yen) rose by 0.5%. Citigroup's strategists noted in the report that over the past year, the Korean won, Singapore dollar, and New Taiwan dollar have shown the highest correlation with the yen, while the Indian rupee and Indonesian rupiah have had the lowest correlation. Barclays stated that the Korean won is one of the most sensitive Asian currencies to the yen's movements, suggesting that further yen appreciation could sustain the won's previous upward momentum. In a rare move, South Korea also synchronized its dollar selling with the U.S.-Japan intervention, pushing the won to a nine-month high. Mitul Kotecha and other strategists at Barclays in Singapore wrote in a report released on Monday: "Given that recent intervention actions may be coordinated in nature, their spillover effects on Asian foreign exchange markets could exceed levels simply inferred from historical beta coefficients." They added: "This could further strengthen support for currencies sensitive to yen movements in the short term, especially in the context of a relatively dovish press conference by Federal Reserve Chair Kevin Warsh last week that prompted an overall dollar retreat." Although the U.S.-Japan intervention helped lift the dollar-yen exchange rate from a nearly 40-year low, historical experience shows that foreign exchange interventions often only change the pace, without reversing the trend. The fundamental issue lies in the U.S.-Japan interest rate differentialU.S. Federal Funds rates are as high as 3.50% to 3.75%, while Japan's policy rate is only at 1%, maintaining a differential of 250 to 275 basis points. Global investment strategist at Franklin Templeton Institute remarked: "Repeated interventions may buy time, but each round of intervention carries the same limitation: while Japanese authorities desire a stronger yen, they are unwilling to fully bear the policy costs required to achieve this goal." A senior fellow at the Brookings Institution candidly stated: "As long as Japanese government bond yields are artificially constrained, the yen is overvalued and needs to decline." He believes that intervention cannot solve the fundamental issues. Furthermore, the ongoing structural impact of Middle Eastern conflicts on Japan's economy persists, as Japan relies on the Middle East for 70% of its oil imports. As long as transportation through the Strait of Hormuz remains disrupted, high energy prices will continue to erode Japan's trade balance. Additionally, Japan's fiscal and industrial structural dilemmas have not changed; long-term issues such as aging, industrial hollowing, and insufficient innovation undermine the fundamental impetus for sustained yen appreciation. More worryingly, the intervention itself may have "side effects." Reports indicate that the U.S. sold euros rather than dollars to buy yen during this operation, which sharply contrasts with the traditional practice of using dollar assets to finance coordinated interventions, leaving the market surprised. Robin Brooks, a senior fellow at the Peterson Institute for International Economics, pointedly noted that if the U.S. buys yen by selling euros, investors might infer that U.S. officials are trying to avoid having Japan finance its interventions through the sale of U.S. Treasuries, which is essentially a distortion. Brooks believes: "This method of operation undermines the actual efficacy of U.S. participation in the intervention, as it inevitably leads the market to speculate why the U.S. does not directly use dollars to purchase yen." In his view, this arrangement could ultimately weaken rather than strengthen market confidence in the yen.