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

The Japanese yen reached fresh seven-month highs against the US dollar on Tuesday, as traders unwound short positions and bet on a Bank of Japan interest-rate hike. The yen surged to 153.53 per dollar in morning trading, surpassing previous levels and its strongest since February. This followed a 1.2% jump the previous day during a thin session due to a US holiday, with the Japanese currency strengthening nearly 4% from around 160 yen per dollar early last week.

Analysts attribute the movement to a combination of factors, including expectations of a faster pace of Bank of Japan tightening, potential Japanese investors repatriating funds, unwinding carry trades, and US political pressure. The yen's rally appears to be a sharp reversal of short positions, with some analysts suggesting it could test the next support layer.

The dollar weakened slightly, with the dollar index at 98.83, while the euro and sterling both gained 0.06%. Market attention now shifts to US inflation data this week, particularly ahead of the Federal Reserve meeting on September 15 to 16, where traders now estimate a roughly 60% chance of a Fed rate hike in September. Geopolitical tensions in the Gulf, particularly Iran's threat to retaliate against any US attacks, are also being closely watched, with concerns over the impact on energy infrastructure and inflation.

The New Zealand dollar edged up 0.1% to 0.5882, while the Australian dollar held steady at 0.7219. China's offshore yuan remained flat near a 3-1/2-year high at 6.708 per dollar as investors await trade data expected to show a faster-than-anticipated export growth in August.