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The Japanese yen surged to a seven-month high on Monday as traders reassessed the \u200bbattered currency\u2019s outlook, driven by expectations of faster Bank of Japan policy tightening and growing bets that Japanese \u200cinvestors could repatriate funds.<\/strong><\/p>\n The main event this week is Friday\u2019s U.S. inflation report, which could shape the Federal Reserve\u2019s decision on whether to raise interest rates later this month and influence the dollar\u2019s direction.<\/p>\n The European Central Bank also meets on Thursday and is widely expected to raise euro zone \u200binterest rates. Much \u200bof the yen\u2019s post-intervention gain quickly faded, but fresh support from capital repatriation, unwinding carry trades and U.S. political pressure is prompting \u200binvestors to rethink long-held bearish positions.<\/p>\n Lee Hardman, senior currency analyst at MUFG, said the dollar\u2019s break below 155 yen seemed to have reinforced traders\u2019 bullish views on the Japanese currency.<\/p>\n \u201cSo far this year, when we have seen the yen strengthen following bouts of intervention, that 155 level was \u200bwhere dollar\/yen tended to bottom out. Breaking past that level is a bullish signal and we could see further upside \u200bfor the yen,\u201d he said.<\/p>\n The move has been sharp. The dollar traded above 160 yen as recently as last Tuesday. Eric Robertsen, global head of research and chief strategist at Standard Chartered, said that while carry trades have been among the strongest-performing macro trades this year despite a surge in borrowing costs globally, the yen\u2019s recent rally poses a potential challenge.<\/p>\n \u201cIf the JPY were to strengthen persistently, this may signal that the increase in \u200bJPY and USD rates is starting \u200bto trigger a change \u2060in asset allocation,\u201d he said.<\/p>\n The dollar\u2019s slide against the yen also weighed more broadly on the U.S. currency. The euro rose 0.15% to $1.1630 , while the pound gained a similar amount \u200bto $1.3539.<\/p>\n The dollar faces a crucial week, with traders pricing a roughly 60% chance of a \u200bFederal Reserve rate \u2060hike this month following Friday\u2019s stronger-than-expected U.S. nonfarm payrolls report. \u201cA hot CPI print would all but seal a September hike and underpin a firmer U.S. dollar. A cooler reading would strengthen the case for a hold \u2060and leave \u200bthe U.S. dollar vulnerable to a dovish Fed repricing,\u201d said Elias Haddad, \u200bglobal head of markets strategy at BBH.<\/p>\n \u201cEven if a September Fed hike becomes a done deal, we doubt the U.S. dollar will make new cyclical highs. \u200bTightening by other major central banks limits policy divergence.\u201d<\/p>\n<\/div>\n
Until then, the focus remains on the yen. The dollar fell to as low as 154.05 yen, its weakest \u200blevel since February, and was last down 1.1% at 154.4. It has now broken below lows \u2060reached in August after Washington and Tokyo jointly intervened to support the Japanese currency, which was then trading at 40-year lows.<\/p>\nCARRY TRADES<\/strong><\/h3>\n
Another factor has been the \u200cpotential \u2060unwinding of yen-funded carry trades, which had contributed to the currency\u2019s weakness.<\/p>\nCPI IN FOCUS<\/strong><\/h3>\n
That leaves this week\u2019s U.S. inflation data firmly in focus.<\/p>\n