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

Japan's currency, the yen, strengthened for the strongest week in over a month as traders anticipated a potential interest rate hike from the Bank of Japan and kept an eye on forthcoming US payrolls data. The yen reached a high of 155.25 per dollar in early trade, just shy of the 155.20 peak it achieved last month following a joint intervention by Japan and the US to curb its decline.

It later settled at 155.71, hovering around a 2.5% gain for the week, the largest weekly surge since late July when the rare intervention took place.

Analysts attribute the yen's surge to traders betting that the Bank of Japan may adopt a more hawkish stance than previously anticipated during its meeting on September 17-18. "This appears less like a short squeeze and more like the market cautiously reassessing a more hawkish BOJ path," commented Masahiko Loo, a senior fixed income strategist at State Street Investment Management in Tokyo. "Markets are finally starting to accept the possibility of Japan normalizing policy into 2027."

Japan's top currency official, Atsushi Mimura, expressed vigilance regarding exchange-rate fluctuations and maintained regular communication with US authorities. This cautious optimism also extended to other major currencies. The dollar index, which gauges the greenback against a basket of currencies including the yen and the euro, remained flat at 99.01, leaving the euro stable at $1.1625 and the British pound at $1.3527.

As the focus returns to crucial data releases ahead of the Federal Open Market Committee (FOMC) meeting on September 15-16, nonfarm payrolls and CPI inflation figures are set to be unveiled. The dollar was expected to decline by 0.7% over the week. Federal Reserve Governor Christopher Waller indicated on Thursday a leaning towards maintaining interest rates steady during the upcoming meeting if subsequent inflation data showed prices moderating.

Traders had reduced expectations of a rate hike this month following Waller's relatively dovish remarks, with the probability of a rate move this month reverting to 50%. Investors were also monitoring geopolitical tensions in the Gulf and their potential impact on inflation. Brent crude futures remained elevated above $95.52 a barrel, following US strikes on Iran this week.

Meanwhile, the New Zealand dollar gained 0.2% to $0.5892 after the central bank increased its cash rate by 25 basis points to 2.75% on Wednesday, signaling more tightening ahead. The Australian dollar also edged up by 0.1% to $0.7206. In the cryptocurrency market, Bitcoin experienced a slight drop of 0.3%, settling at $80,995.51.