Dollar could hit 170 yen without coordinated intervention, Edmond de Rothschild says

The yen's slide to a 40-year low has become so disconnected from Japan's economic fundamentals that major central banks may be forced to intervene in concert, according to Edmond de Rothschild Asset Management.

The dollar's surge to 162.83 yen — a 40-year high reached July 1 — reflects excessive yen weakness that fails to capture Japan's strong economic fundamentals, a misalignment that could trigger coordinated intervention by the Bank of Japan, Federal Reserve and European Central Bank in the second half of 2026.

"The strong fundamentals of the Japanese economy cannot be translated into such a low level for the yen," said Michael Nizard, head of multi-asset and overlay at Edmond de Rothschild Asset Management, which oversaw €107 billion ($122.42 billion) as of Dec. 31.

Without intervention, the dollar could strengthen to 170 yen within three months, Nizard said. The U.S. currency last traded at 161.76 yen. The dollar's ascent is driven by interest-rate differentials between Japan and the U.S., where money markets price one rate increase by December and the risk of a second in early 2027, LSEG data show.

A move to 170 yen would make Japanese industry more competitive — a dynamic Nizard said the Trump administration "cannot accept." If coordinated intervention succeeds in pushing the dollar down to around 155 yen, the recent 40-year high just shy of 163 yen should mark the peak, he said. "If it's not coordinated, it would be just a brief moment for the yen to strengthen."

Coordinated Intervention Would Reshape Bond Markets

Nizard expects the BOJ, Fed and ECB to act together in the second half of the year. Such a move would support the yen and improve risk sentiment across global markets, potentially generating demand for U.S. Treasurys, notably 10-year notes, he said.

The Treasury yield curve has flattened significantly as markets priced in more Fed rate hikes because of inflation fears stemming from higher oil prices, pushing short-dated bond yields higher. Nizard expects the curve to steepen as markets scale back expectations for higher rates.

"We think that the next move should be the steepening of the curve," he said. A tipping point will come when the Fed shifts from its current hawkish stance to a more neutral position, Nizard added. Steepening would be sparked by falling yields on shorter-dated bonds while longer-dated yields remain at risk of rising because of expansive U.S. fiscal policy and large-volume Treasury issuance.

Eurozone Bonds Offer Relative Value

Within the G-3 markets of the eurozone, U.S. and U.K., Edmond de Rothschild favors eurozone government bonds given recent positive economic data, including higher-than-expected growth and lower-than-expected inflation. "While a September rate hike by the European Central Bank remains an open question and is not a done deal, continued positive inflation data could lead the market to fully deprice future ECB hikes, cementing safety and value in the euro bond market," Nizard said.

Among conventional government bonds, the asset manager likes two-year to five-year maturities on expectations that global rate-hike forecasts will recede further. However, the firm overall favors inflation-protected bonds given lingering inflation risks, with AI investments likely to spur inflation in the near term.

The last time the yen traded at such extreme levels relative to Japan's economic fundamentals was in the mid-1980s, when the Plaza Accord — a coordinated intervention by the G-5 nations — was deployed to weaken the dollar. That agreement pushed the dollar from around 240 yen to 150 yen within two years, demonstrating the potential scale of impact from a concerted central bank effort.

This article is for informational purposes only and does not constitute investment advice.