The Japanese yen rose in Asian trading on Tuesday against a basket of major and minor currencies, extending its strong gains for the second day in a row against the US dollar and hitting a seven-month high, as buying of the Japanese currency accelerated amid a range of strong catalysts.
These catalysts include a decline in the US dollar and a slowdown in US Treasury bond yields ahead of the release of key US inflation data, which will provide crucial clues about the likelihood of the Federal Reserve raising interest rates this September.
It also includes the Bank of Japan’s hawkish stance, which has boosted bets on the continued normalization of Japanese monetary policy this year, leading to an acceleration in the unwinding of carry trades based on interest rate differentials.
Price overview
Today's Japanese Yen exchange rate: The dollar fell against the yen by 0.95% to (152.89¥), the lowest since last February, from today's opening price of (154.34¥), and recorded a high of (154.38¥).
The yen ended Monday's trading session up 1.2% against the dollar, its third gain in the last four days, thanks to the Bank of Japan's hawkish stance.
US dollar
The dollar index fell 0.2% on Tuesday, deepening its losses for the second consecutive session and hitting a three-week low of 98.72 points, reflecting the continued decline in the US currency against a basket of global currencies.
The yield on ten-year US Treasury bonds fell by more than 0.25%, putting further negative pressure on the US dollar's price in the foreign exchange market.
These developments come as the US administration renews pressure on the Federal Reserve to cut interest rates, while markets await key US inflation data this week, which will provide crucial clues about the future path of US interest rates.
Bank of Japan
Bank of Japan Governor Kazuo Ueda said last week on the sidelines of the G20 meeting in the United States that the bank would discuss raising interest rates, including during the September meeting, focusing on whether inflation risks were escalating.
Bank of Japan board member Hajime Takata said monetary policy should be more flexible in raising interest rates to counter rising inflationary pressures, rather than adhering to a fixed timetable for raising them.
During his meetings last week with the Japanese finance minister and the governor of the Bank of Japan, US Treasury Secretary Scott Bisent called for moving forward with raising interest rates and supporting the yen.
These comments and actions have reinforced bets that Japanese monetary policy will continue to normalize this year, and that interest rates will be raised more than once during the remainder of the year.
Japanese interest rate
The pricing of the probability that the Bank of Japan will raise interest rates by a quarter of a percentage point at its September meeting is currently stable at around 99%.
In order to reprice those probabilities, investors are awaiting further data on inflation, unemployment and wage levels in Japan.
Curry deals
With bets increasing that the Bank of Japan will raise interest rates more than once this year, uncertainty is growing about the path of US interest rates, especially with declining expectations about the pace of monetary tightening in the United States.
With the current spread between Japanese and US interest rates expected to narrow, the appeal of yen-based carry trades is declining, which may prompt investors to accelerate the unwinding of these trades and return funds to the yen.
Opinions and analyses
Tony Sycamore, a market analyst at IG, said that the decline in the dollar/yen pair looked more like a sharp unwinding of short positions on the yen, after the pair broke key support levels, particularly at 155 yen.
Sycamore added: After falling below the 155 yen per dollar levels seen in August and May, it paves the way for testing the next support level at 153 yen.
