COMMENT-Traders should worry about what BOJ may do to the dollar

Traders should worry about what Bank of Japan may do to the dollar as the consequences of any intervention intended to support Japan's currency will have a big impact on the U.S. currency at an important time.

If the BOJ sells USD/JPY to cap an advance which has almost reached the point where the central bank last sold in 2022, it is influencing two currencies, not one.

Traders focused on the yen which soared after intervention in 2022, but subsequently surrendered those gains, should consider the implications of a weaker dollar.

The dollar slumped after the BOJ sold dollars in 2022 and has never fully recovered with its trade-weighted value about 4% weaker at the end of February than it was in October 2022.

The dollar index took a much bigger hit collapsing from 114.78 to 99.55 in the aftermath of the BOJ's dollar sales and it's currently 104.69.

Should the BOJ sell again to curb a USD/JPY rise, it will be selling a dollar that is broadly weaker than it was before, and will be doing this when the U.S. central bank is considering easing monetary policy.

A lower dollar resulting from any intervention would effectively ease monetary policy, potentially stopping the U.S. central bank from cutting interest rates.

This could have a destabilising affect on financial markets leading to risk aversion that influences currencies - possibly leading to a dollar surge later this year.

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