Yen Strengthens Amid Weaker Dollar Expectations

The Japanese yen strengthened against the US dollar on August 17, despite weaker-than-expected economic growth data. The currency market was influenced by declining expectations of Federal Reserve interest rate hikes this year.

The yen gained 0.2% to trade at 159.055 per dollar, marking its second consecutive day of modest gains against the US currency. Japan's GDP grew at an annualized rate of 1.1% in the second quarter, with analysts at Capital Economics giving a mixed assessment of the details.

Government measures to curb the pass-through of higher energy prices to consumers remained in place, while a notable increase in government consumption may indicate that Takaichi's expansionary fiscal policy is beginning to have an impact. The US dollar index fell 0.1% to 99.519, near a one-month low.

The market has revised its expectations for Fed rates, with less than one full increase priced in for December. This is due to softer US data in recent weeks, including figures on nonfarm employment and consumer and producer inflation. No significant new signals from the US central bank are expected before the Jackson Hole symposium.

The long end of the Treasury yield curve remains elevated, with some commentators linking higher yields to concerns over confidence. The probability of rates remaining unchanged after the upcoming two-day Fed meeting is put at 66.9% by Federal funds rate futures.