Yen Rises to Seven-Month High as Rate Hike Expectations Strengthen
The US dollar has taken a hit as expectations for another Bank of Japan interest rate hike strengthen the Japanese currency. The yen has surged to a seven-month high against the dollar, with markets now focused on whether the BoJ will follow up its recent intervention with another rate increase.
Recent comments from policymakers have reinforced expectations that further tightening is needed in Japan, which continues to deal with inflation and a weaker currency. The BoJ's next policy meeting will conclude on 18 September, with markets pricing an 80% chance of a 0.25 percentage point rate hike at that meeting.
Higher Japanese rates could also weaken the carry trade, a long-standing force that has weighed on the yen. As Japanese rates rise and the yen strengthens, investors may be encouraged to unwind their positions and add demand for the currency.
Japan's Ministry of Finance confirmed it spent ¥15.4 trillion intervening in foreign exchange markets between 30 July and 26 August, its largest such operation on record. The intervention has been followed by a sustained recovery in the yen, helped by changing rate expectations and speculation that more Japanese capital could return home.
Attention now turns to US inflation data due on 11 September, which will provide another indication of whether price pressures remain strong enough to influence the Federal Reserve's next decision. Agustina Patti, Financial Markets Strategist at Exness, notes that 'markets are becoming increasingly confident that higher interest rates are coming in Japan', which could make borrowing in yen less attractive and encourage some money to move back into the country.