(Bloomberg) -- The resurgent dollar is proving no match for the yen.
Japan’s currency rose against every single Group-of-10 peer in the first half, with an average 4.8 percent gain. That’s outpaced the dollar, which trumped 8 peers and advanced 2.9 percent.
Now a combination of U.S. protectionism, European populism and emerging market turmoil threatens to push the yen even higher in the second half, according to analysts.
“The focus for the second half is yen crosses,” said Daisuke Karakama, chief market economist at Mizuho Bank Ltd. in Tokyo. The currency is weak on a real effective exchange rate basis, and there are a number of risk-off events which suggest that “the yen is bound to rise. The magnitude for adjustment is great,” he said.
Here’s a look at what might affect prominent yen-crosses in the second half of 2018:
Europe’s Unrest: Euro-yen
A regional election in October in Germany, a spat on immigration that is rocking Chancellor Angela Merkel’s coalition, and Italy’s budget tussle with Brussels are all factors which could fan risk aversion and underpin the Japanese currency, traditionally seen as a haven from political turmoil.
“The risk factor for yen crosses is euro-zone politics,” said Minori Uchida, head of global market research at MUFG Bank Ltd. in Tokyo. If Italian bond yields jump on concerns about the country’s fiscal deterioration, the euro will be sold against the dollar and the yen will strengthen on risk aversion, he said. “The euro’s fall below 120 is possible in the worst case.”
The common currency has fallen about 6 percent since a two-and-a-half year high of 137.50 yen in February. It dropped below 125 in May for the first time in almost a year amid uncertainty over the new Italian government, and was around 129.29 yen Tuesday.
Down Under: Aussie-yen
The Australian dollar is taking blows from a widening yield spread with Treasuries and the U.S.-China trade spat. The nation relies on the Chinese to buy its commodity exports. Meanwhile, the central bank is seen holding rates at a record low.
The Aussie-yen cross may be particularly vulnerable, said Jun Kato, chief market analyst at Shinkin Asset Management Co. in Tokyo. “With Australian real estate markets falling and banks’ credit stance tightening and reducing liquidity, the RBA’s rate increase may be pushed back. That would mean AUD/JPY could fall toward the mid-70 yen levels.”
RBA Window to Normalize Australian Policy Narrows as Risks Mount
The Aussie fell almost 7 percent against the yen in the first half to 82.008 Friday, following a 4.5 percent gain in 2017.
Trade War: Dollar-yen
The yen is the best performer among the G-10 currencies against the dollar, up 1.7 percent in the first half. Concerns about the U.S. sparking a global trade war have more than offset the boost for the dollar from rate hikes by the Federal Reserve.
The Japanese currency traded around 110.91 against the dollar on Tuesday.
“The uptrend in USD/JPY is over and the pair may gradually test its downside in the second half,” said Tohru Sasaki, head of Japan markets research at JPMorgan Chase & Co. “Trade will be one factor supporting the yen. But its appreciation may halt around 105 where dollar buyers will emerge.”
Emerging Exodus: EM-yen
Rising U.S. interest rates and a stronger greenback have pummeled emerging markets in recent weeks. Foreigners have pulled around $25 billion from Asia’s developing market equities this year.
“Pressures for yen appreciation will come from emerging currencies,” according to Mizuho’s Karakama. “Another tantrum in emerging markets is possible as the U.S. marks a year of winding down its balance sheet.”
In the first half, the Turkish lira has dropped almost 19 percent against the Japanese currency, the Indian rupee 8.3 percent and the Korean won 5.6 percent.
©2018 Bloomberg L.P.