Yen extends rally to new seven-month high; dollar subdued ahead of CPI

Japanese yen reached a new seven-month high against the U.S. dollar on Tuesday, soaring to as much as 153.53 per dollar in morning trading. This surge surpassed levels seen during Japan's July intervention and marked the yen's strongest point since February. The Japanese currency's rise was fueled by a combination of factors, including expectations of a Bank of Japan interest-rate hike, potential repatriation of funds by Japanese investors, and U.S. political pressure.

Analysts noted that the yen's rally appeared to be driven by a significant unwind of short positions, as traders capitalized on the currency's break below critical support levels around the 155 yen mark.

Meanwhile, the dollar was subdued ahead of the upcoming CPI data, which is set to be released this week. The dollar index, a measure of the greenback's strength against a basket of currencies, slipped to 98.83, reflecting the yen's dominance in the market. In contrast, both the euro and sterling experienced a slight uptick, closing at $1.1628 and $1.3549, respectively.

Traders are now focusing on the forthcoming U.S. inflation readings, which will provide crucial insights into the Federal Reserve's monetary policy stance. Following the stronger-than-expected nonfarm payrolls report on Friday, there is a roughly 60% chance of a Federal Reserve rate hike this month. Geopolitical tensions in the Gulf also remain a topic of concern, as Iran's threat to retaliate against any new U.S. attacks on its assets has raised fears of potential disruptions to energy infrastructure, including U.S. oil and gas interests.

The New Zealand dollar strengthened by 0.1% to $0.5882, while the Australian dollar remained flat at $0.7219. China's offshore yuan held steady near a 3-1/2-year high, trading at 6.708 per dollar as investors awaited trade data that is expected to reveal a faster growth rate in Chinese exports during August.