Yen Weakness Keeps Carry Trade Alive, But Risk of Sudden Reversal Remains

The Japanese yen has fallen below 158 against the dollar after traders reduced their expectations for another Bank of Japan rate hike this month. This has kept yen-funded carry trades attractive, but also raises the risk of a sudden reversal that could impact Bitcoin and the broader crypto market.

During the August 2024 carry trade unwind, investors reduced leverage and sold liquid risk assets, hitting both Bitcoin and the crypto market. Now, Japan's rising bond yields and the prospect of more BOJ rate hikes are putting pressure on yen-funded trades, even if an October move is delayed.

Takuya Kanda, senior FX analyst at Gaitame.com Research Institute, said that if the dollar-yen rises above 158, intervention concerns will likely cap the dollar's upside. Japan and the US conducted a coordinated currency intervention in July to prevent the yen from falling to 40-year lows.