The yen climbed to a seven-month high against the dollar on Monday as traders increased bets that the Bank of Japan could tighten monetary policy, while the US currency weakened ahead of crucial American inflation figures.
The dollar fell as low as 154.05 yen, its lowest level since February, before recovering slightly to trade around 154.64 yen, down about 1% on the day. It had been above 160 yen as recently as Tuesday.
Investors are reassessing the outlook for Japan’s currency amid speculation that Japanese investors could bring more money home and that yen-funded carry trades may be unwound. The yen has also been supported by expectations of further action from the Bank of Japan, which is due to hold its next policy meeting on 17 and 18 September.
Lee Hardman, senior currency analyst at MUFG, said the yen’s move through the 155 level had strengthened the market’s bullish view of the currency.
“Breaking past that level is a bullish signal and we could see further upside for the yen,” he said.
The shift marks a sharp change from earlier in the year, when intervention by Washington and Tokyo helped lift the yen from 40-year lows. Much of that support faded quickly, but investors are now responding to a combination of monetary-policy expectations, capital flows and the prospect of further intervention if the currency comes under renewed pressure.
Attention is also turning to the US consumer price index, which the Bureau of Labor Statistics is scheduled to publish on Friday 11 September. The figures are expected to influence expectations for the Federal Reserve’s interest-rate decision later this month.
Markets were pricing in roughly a 57% chance of a Federal Reserve rate increase after a stronger-than-expected US jobs report on Friday. A hotter inflation reading could reinforce those expectations and offer support to the dollar, while a softer figure could revive bets that officials will leave rates unchanged.
“A hot CPI print would all but seal a September hike and underpin a firmer US dollar,” said Elias Haddad, global head of markets strategy at BBH. “A cooler reading would strengthen the case for a hold and leave the US dollar vulnerable to a dovish Fed repricing.”
The dollar’s decline against the yen also gave modest support to other major currencies. The euro rose 0.1% to about $1.1624, while the pound gained slightly more to trade near $1.3536.
Eric Robertsen, global head of research and chief strategist at Standard Chartered, said the recent strength of the yen could threaten the performance of carry trades, in which investors borrow in a low-interest-rate currency to invest in higher-yielding assets.
“If the JPY were to strengthen persistently, this may signal that the increase in JPY and USD rates is starting to trigger a change in asset allocation,” he said.
