Yen stands tall as US dollar wobbles

The Japanese yen strengthened to 153.65 per US dollar, reaching a seven-month high, while the dollar faced pressure from rising oil prices amid a widening conflict in the Middle East. Iranian-backed Houthis attacked several Saudi cities, escalating tensions in the ongoing war, and US forces targeted Iranian oil tankers and a US base in Jordan. This geopolitical turmoil sent Brent crude futures soaring over 1.48% to $99.37 per barrel, casting a shadow over global markets ahead of a crucial US inflation report.

The currency market saw the dollar dip slightly, although some analysts blamed the yen's sharp rise over the past week. The euro stood steady at US$1.1631, and the British pound last bought US$1.3546. The dollar index, which tracks the US currency against six major rivals, hovered near its lowest point in nearly two weeks at 98.15.

Analysts at OCBC noted that the recent tensions highlight the potential implications of higher energy prices for Fed policy, especially after a strong US jobs report reignited expectations of another interest rate hike. The yen's rise in September has shifted the dynamics of the carry trade, where investors borrow yen at low costs to invest in higher-yielding assets.

With a 4% increase, the yen is now trading at 153.65 per US dollar, close to its seven-month high of 152.89 hit on Tuesday. The rally has been widespread, with the yen gaining against the euro, sterling, Mexican peso, and Turkish lira.

The Bank of Japan is expected to raise rates by 25 basis points at its upcoming meeting on September 17-18, but the rally's strength depends on whether Governor Kazuo Ueda will voice hawkish sentiments. The wild card remains the US Federal Reserve, with market expectations hinging on its trajectory of interest rate hikes. The fair value for the yen is estimated to be in the 140s, suggesting a further movement in this direction is likely after the recent overshooting of yen weakness.

Across the Pacific, the Australian dollar climbed 0.12% to US$0.7225, just short of its four-month high, while the New Zealand dollar rose 0.16% to US$0.5862.