Goldman Sachs Sees Yen at 162 in Three Months, Says Carry Trade Will Persist Despite Intervention

Goldman Sachs projects the Japanese yen will weaken to 162 per dollar in three months, 163 in six months and 165 in 12 months. The bank said intervention by Japanese authorities to support the yen would have only a temporary effect, keeping the yen carry trade in place for now.

CNBC, citing a Goldman Sachs report on July 6, said the bank expects further yen weakness against the dollar and sees any Japanese intervention to prop up the currency as short-lived.

Goldman raised its dollar-yen forecasts to 162 in three months, 163 in six months and 165 in 12 months, up from previous projections of 160, 158 and 155.

The yen fell to its weakest level against the dollar in 40 years last week, fueling speculation over whether Japan's Ministry of Finance would step into the market to support the currency.

Goldman said pressure on the yen is likely to persist as U.S. Treasury yields stay elevated for longer, recession risks remain low, fiscal concerns continue and the Bank of Japan is likely to raise interest rates only gradually.

The bank cited Japan's intervention in May as an example, saying the move only briefly slowed the yen's decline before dollar-yen resumed climbing.

Japan intervened in the market in April and May with a record 11.7 trillion yen, or about $71.9 billion, but effectively failed to bolster the currency. Goldman expects any renewed intervention to produce a similar result.

Goldman said there is little to halt the rise in dollar-yen unless the U.S. economy suffers an unexpected setback or the Bank of Japan shifts to more aggressive monetary tightening.

The bank also said Japan's fiscal stimulus could lift the term premium on Japanese government bonds relative to U.S. Treasuries, a pattern historically associated with gains in dollar-yen. Intervention by Japanese authorities may buy time, it added, but support for the yen would probably prove temporary unless the U.S. economy falls into recession or the Bank of Japan sharply accelerates rate hikes.

Goldman also said two forces supporting dollar strength this year — energy supply disruptions and a U.S. artificial intelligence investment boom — are likely to keep the greenback strong against low-yielding currencies for the time being.

The report said a weaker dollar was unlikely. Goldman also lowered its euro outlook, forecasting euro-dollar at 1.14 in three months before slipping to 1.12 in six months and holding there over 12 months.

Against that backdrop, Goldman said it continues to favor the yen as a funding currency for emerging-market investments offering high carry returns. That implies investors will keep borrowing in the low-yielding yen and deploying the funds in higher-yielding markets.

Goldman, however, maintained a bullish view on several emerging-market currencies. It kept a constructive outlook on the Indian rupee, citing stronger growth tied to actions by the Reserve Bank of India, easing inflation and expected capital inflows.

Kim Jung-a, contributing reporter at Hankyung.com, kja@hankyung.com