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

The Japanese yen surged to a fresh seven-month high against the US dollar on Tuesday, trading at 153.53 per dollar, surpassing levels reached during Japan's July intervention. This marked a significant strengthening of the currency, with analysts attributing the rally to traders unwinding short positions and the anticipation of a Bank of Japan interest-rate hike.

The yen's ascent was fueled by multiple factors, including potential Japanese investors repatriating funds, carry trades unwinding, and US political pressure. The drop appeared to be a sharp reversal of yen shorts following a breach of critical support levels. The stronger yen also impacted other currencies, with the euro and sterling both experiencing a slight increase.

Looking ahead, market focus shifted to US inflation readings this week, with traders pricing a roughly 60% chance of a Federal Reserve rate hike following a stronger-than-expected nonfarm payrolls report. Geopolitical tensions in the Gulf also garnered attention due to Iran's threat to retaliate against any US attacks, raising concerns about potential impacts on energy infrastructure and inflation.

Oil prices remained near a six-week high, while the New Zealand and Australian dollars showed slight gains. China's offshore yuan held steady near a three-and-a-half-year high as trade data were awaited, expected to indicate faster growth in exports.