The Japanese yen rose nearly 2% against the U.S. dollar on Sept. 4, strengthening to 155.81 per dollar in its biggest one-day gain since the joint U.S.-Japan foreign exchange intervention.
The rebound was driven mainly by growing expectations that the Bank of Japan will raise rates, while speculative short covering and haven demand added support. Softer comments from U.S. Federal Reserve officials also helped cap dollar rate expectations and narrowed the expected U.S.-Japan rate gap.
Yen rebounds from the 160 level
The yen recovered from around 160 touched earlier this week to 155.81, as markets increased bets that the BOJ will raise interest rates at its Sept. 18 policy meeting.
The swap market has almost fully priced in a 25 basis point hike in September and sees the probability of another increase in December at about 80%. Covering of speculative short yen positions, together with haven buying from domestic investors, amplified the day’s gain.
Waller comments weigh on the dollar outlook
Alongside the BOJ’s more hawkish stance, comments from Federal Reserve Governor Christopher Waller on inflation progress also tempered expectations for further U.S. rate hikes.
The Bloomberg Dollar Spot Index then fell 0.6% to a recent low. Expectations that the gap between U.S. and Japanese monetary policy will narrow have eased part of the long-running pressure on the yen.
Intervention risk remains in focus
Japanese authorities have spent a record $96.4 billion over the past month to support the currency. Atsushi Mimura, Japan’s top foreign exchange official at the Ministry of Finance, has also publicly expressed dissatisfaction with current exchange-rate levels and said authorities will continue to respond to market moves.
Because Japan’s Silver Week holiday follows soon after the September policy meeting, traders are watching closely for the possibility of another intervention during a period of thinner liquidity. That has kept overall market positioning cautious.
Policy path remains the key variable
Market strategists said the longer-term direction of the yen will still depend on how aggressively the BOJ tightens policy and on the direction of the dollar itself. BOJ board member Hajime Takata recently said back-to-back rate hikes cannot be ruled out, adding to expectations for a more aggressive path.
If the policy path fails to match the pace of tightening now priced in by the market, the foreign exchange market could still turn volatile and give back part of the rally. Investors are also continuing to watch for any fresh official intervention.