(Bloomberg): As the yen continues to fall through key exchange rates, Japanese authorities are confronted with a stark reality: Unless the U.S. Federal Reserve eases its “higher, longer” policy stance, the yen’s depreciation will continue — and there is nothing the Japanese authorities can do to stop it.

This is a common understanding worldwide as investors analyze the impact of the dollar’s strength on the world as high U.S. interest rates push up the dollar. In a foreign exchange market that is worth $7.5 trillion a day, the unstoppable weakening of the yen is an extreme manifestation of U.S. financial dominance.

“It’s all down to the Fed,” said Andrew Brenner, head of international fixed income at NatAlliance Securities. “The higher, longer approach has kept short-term interest rates extremely high, which has led to capital inflows into the U.S. and kept the dollar strong.” For Japan, he said, “This is a problem.”

The US’s dominance over global financial markets was on full display in trading on the 26th. The dollar index hit a new high for the year, weighing on currencies around the world. U.S. stocks were coming off another strong quarter, and the U.S. Treasury Department’s $70 billion five-year note auction easily found buyers.

Meanwhile, the yen temporarily fell 0.7% against the dollar to 160.87 yen, easily surpassing the weak yen/strong dollar levels that prompted Japanese authorities to intervene in April. Against the euro, the yen temporarily dropped to 171.80 yen, hitting a new low since the euro was established in January 1999. In response to the yen hitting its lowest level in about 38 years, Finance Minister Kanda Masato commented that “recent exchange rate movements have been in one direction,” and indicated a willingness to intervene in the foreign exchange market, saying, “We will take necessary measures against excessive movements.”

The problem is that efforts by Japanese authorities to shore up the yen have so far failed. The yen lost gains in the weeks following a 9.8 trillion yen ($1.2 trillion) yen-buying intervention. Re-intervening would likely be ineffective, strategists say.

“Until the Fed actually eases, I don’t think these Japanese efforts will be effective,” said Bob Savage, head of market strategy and insights at BNY Mellon. “The bigger picture is that you have to reduce demand for dollars in Japan. Either long-term Japanese interest rates need to get high enough or U.S. interest rates need to get low enough. Neither of those have happened.”

Asset managers are building up short positions in the yen, with last week reaching the most bearish in data dating back to 2006, according to data released by the Commodity Futures Trading Commission on the 24th.

The driving force behind the weakening of the yen and the strengthening of the dollar this year has been the interest rate differential between Japan and the United States.

However, this was an unexpected development. At the beginning of the year, the market had expected the Bank of Japan to move away from its ultra-low interest rate policy, while the U.S. Federal Reserve would begin a series of interest rate cuts, leading the global trend toward monetary easing. However, in the end, the U.S. Federal Reserve held off on cutting interest rates in response to the resilient U.S. economy and persistent inflation. The Bank of Japan only raised interest rates slightly.

“The yen was supposed to rise along with Japanese rates this year,” said Cathy Jones, chief fixed-income strategist at Charles Schwab & Co. But even now, “we’re still in a state of waiting,” she said.

The next big thing that could move the yen is the U.S. personal consumption expenditures (PCE) price index, due to be released on the 28th. Economists surveyed expect the core PCE price index, which excludes volatile food and energy prices, to slow, which could support a U.S. interest rate cut this year.

Japan has a lot to lose. Citigroup estimates that Japanese authorities need $200 billion to $300 billion to intervene again. If they do, they will have to use their foreign exchange reserves, such as dollars, or sell their holdings of global government bonds to buy yen.

Dominic Konstam, head of macro strategy at Mizuho Securities, said that as the Bank of Japan normalizes monetary policy, its currency intervention is more about “slowing down the yen’s search for an eventual bottom.”

“The problem with Japan’s monetary authorities is they’re intervening on the wrong side,” he told Bloomberg Radio on Tuesday. “They have limited foreign exchange reserves and can’t spend hundreds of billions of dollars to defend their currency.”

Original title: Yen’s Relentless Drop Showcases Fed’s Grip on Global Markets (1) (excerpt)

–Reporting assistance from Naomi Tajitsu and Masaki Kondo.

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