Yen climbs to seven-month high on hawkish BOJ bets

On Tuesday, the Japanese yen reached a near seven-month high, buoyed by expectations of a Bank of Japan rate hike next week. This caused bearish traders to sell off, exerting pressure on the dollar in the run-up to U.S. inflation data this week. The yen surged to as high as 152.89 per dollar, surpassing levels seen during Japan's July intervention and attaining its strongest point since February.

However, it subsequently dipped to 154 in London morning trade. The Japanese currency has gained approximately 4% from around 160 yen per dollar earlier in the week. This shift in the currency is attributed to various factors, including expectations of a faster pace of Bank of Japan tightening, potential Japanese investors repatriating their funds, unwinding of carry trades, and U.S. political pressure.

Dominic Bunning, Nomura's head of G10 FX strategy, acknowledged that the market-driven flow is likely due to investors becoming more bullish on the Bank of Japan's stance at the upcoming meeting. However, the Bank of Japan faces challenges in hiking faster than the market has priced in or to a higher terminal rate. The expectation is that the central bank will raise interest rates by 25 basis points to 1.25% at the September 17-18 meeting.

Japanese Finance Minister Satsuki Katayama stated that Tokyo and Washington are aligned in their approach to currency markets and will maintain close communication to ensure orderly foreign exchange movements.