Yen headed for strongest week in a month, dollar flat ahead of payroll data

The Japanese yen showcased resilience on Friday, maintaining its gains against the U.S. dollar and positioning itself for a notable weekly increase - its strongest in over a month. Traders escalated their expectations for a Bank of Japan interest rate hike, while investors eagerly awaited the U.S. payrolls data. The yen surged to a high of 155.25 yen per dollar, just below the 155.20 mark achieved during a July intervention.

It subsequently eased and settled at 155.71, marking a potential 2.5% gain for the currency this week, the largest weekly rise since late July when Japan and the U.S. jointly intervened to stabilize the yen. Analysts speculate that the yen's appreciation stems from market expectations of a more hawkish Bank of Japan stance when it convenes on September 17-18.

Senior fixed income strategist Masahiko Loo of State Street Investment Management in Tokyo noted that this movement is indicative of cautious reassessment rather than a speculative short squeeze, as markets begin to accept the possibility of a sustained normalization of Japanese policy into 2027. Simultaneously, Japan's top currency envoy Atsushi Mimura reaffirmed his vigilance toward exchange-rate shifts, maintaining regular communication with U.S. authorities.

The dollar index remained steady at 99.01, leaving the euro and British pound relatively unchanged. Market focus now shifts to forthcoming economic data, such as nonfarm payrolls and CPI inflation, prior to the Federal Reserve's meeting on September 15-16. The greenback was expected to decline by 0.7% over the week. Federal Reserve Governor Christopher Waller hinted at maintaining steady interest rates at the upcoming policy meeting, provided subsequent inflation data demonstrated continued moderation.

Traders curtailed expectations of a September rate hike following Waller's dovish remarks, and the probability of a rate increase this month settled at 50%. In addition, investors monitored geopolitical tensions in the Gulf and their potential impact on inflation, with Brent crude futures surpassing $95.52 per barrel following U.S. strikes on Iran earlier in the week.

Meanwhile, the New Zealand dollar rose 0.2% to $0.5892 following a central bank rate hike of 25 basis points to 2.75% and a subsequent signal of further tightening. The Australian dollar also gained 0.1% to $0.7206. In the realm of cryptocurrencies, Bitcoin saw a minor decline of 0.3%, settling at $80,995.51.