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

Tokyo's currency, the Japanese yen, surged to fresh seven-month highs against the US dollar on Tuesday, as traders unwound short positions anticipating a potential Bank of Japan interest-rate hike. The yen reached as high as 153.53 per dollar in early trading, surpassing levels seen during Japan's July intervention and marking its strongest point since February.

This followed a 1.2% increase on Monday, driven by a U.S. holiday, with the Japanese currency gaining nearly 4% from early last week. Analysts attributed the yen's rally to multiple factors, including expectations of a more aggressive Bank of Japan tightening cycle, potential Japanese investors repatriating funds, unwinding carry trades, and U.S. political pressure.

Tony Sycamore, a market analyst at IG, noted that the yen's decline appeared to be a sharp unwind of shorts after breaking below critical support levels around 155 yen per dollar. As the dollar weakened, the euro and sterling both gained 0.06%, closing at $1.1628 and $1.3549, respectively. Market focus is now shifting to U.S. inflation readings this week, the final set of important data before the Federal Reserve's meeting on September 15-16.

Traders now estimate a 60% chance of a Federal Reserve rate increase during this meeting, following the stronger-than-expected nonfarm payrolls report released on Friday. Additionally, geopolitical tensions in the Gulf are being closely monitored, particularly Iran's threat to retaliate against any U.S. attacks, with warnings that energy infrastructure across the Gulf, including U.S. oil and gas interests, could be vulnerable.

Oil prices remained close to a six-week high, with Brent crude futures trading above $97 a barrel. Meanwhile, the New Zealand dollar strengthened by 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 of 6.708 per dollar as trade data, expected to show a faster export growth rate in August, were released later in the day.