One week after the joint U.S.-Japan intervention to support the country's embattled yen, an initial rally appears to be waning as the currency drifts lower.
The coordinated involvement from the Treasury and BoJ had initially lifted the yen as high as 155 to the dollar, down from just above 163 beforehand.
But since then, it has wavered, giving up almost half of those gains to settle around 158.50 to the dollar, seven days after the move was announced on July 31.
The yen's fundamentals remain under scrutiny, with market watchers now turning their eye to domestic policy changes rather than government-backed support measures.
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How the yen has performed against the dollar since the day before the joint intervention.
Robert Sockin, chief U.S. economist at PGIM, is "not convinced" the strategy will work, writing in a note published Wednesday.
"Yes, the intervention is no doubt squeezing out short yen positions in the short term, but I'm skeptical that it will work in reversing the JPY weakness trend by itself…and it may backfire spectacularly," he wrote.
Should it backfire, Sockin added that speculators might amplify the reversal by aggressively selling yen and Treasurys together to force the BoJ and Fed into precautionary rate hikes.
The coordinated intervention is a rare U.S. effort to support another major currency and underscored Washington's concern that prolonged yen weakness could fuel inflation in Japan, pressure other Asian currencies and destabilize global markets.
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BofA said in a recent note that the objective of the central banks in the short-term is to break ¥155, but that level was touched only briefly before moving lower again.
Treasury Secretary Scott Bessent acknowledged in an interview with CNBC last week that intervention alone would not determine the currency's direction.
"You can give market signals with intervention, but it's policy that turns it," he said, adding that the U.S. participated because it was optimistic about Japan's policy path.
— CNBC's Luke Fountain also contributed to this report.
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