Japanese Yen Edges Lower as Dollar Gains

The Japanese yen weakened past 159 per dollar on Tuesday, extending its recent decline as the dollar gained modestly on safe-haven demand, with a US plan to cut Iran off from the global financial system highlighting the greenback’s central role in international trade. However, renewed concerns over a potential US debt crisis limited the dollar’s gains amid skepticism about the effectiveness of the US Treasury Department’s expanded debt buyback plan. Domestically, former Bank of Japan board member Seiji Adachi said the central bank will likely raise rates next month and again as early as January, warning that holding rates could reignite a yen selloff and accelerate import-driven inflation. Markets are currently pricing in around an 80% probability that the BOJ will raise rates by 25 basis points to 1.25% next month, up sharply from about 23% before the central bank’s July meeting.

The Japanese yen traded little changed around 158.9 per dollar on Monday, as stronger expectations for an early Bank of Japan rate hike continued to underpin the currency. Markets are now pricing an around 82% probability of a September rate increase, up sharply from about 23% before the BOJ’s July meeting, with the widely expected move taking the policy rate to 1.25% from 1%. Investors are awaiting Deputy Governor Ryozo Himino’s speech on Thursday for further clues on the timing and pace of policy tightening, while recent acceleration in Japanese inflation has reinforced expectations for further normalization. Additionally, broad US dollar weakness amid concerns over the Treasury’s expanded long-term bond buybacks added to demand for the yen.

The Japanese yen was little changed around 159 per dollar on Friday after experiencing heightened volatility earlier this week, as data showed Japan’s inflation rate accelerated for the second consecutive month, strengthening the case for a Bank of Japan interest rate hike in the near term. Markets are speculating on a possible move in September, with BOJ Governor Kazuo Ueda indicating that authorities could begin normalizing policy at a faster pace. The yen jumped nearly 1% on Wednesday after the US Treasury Department announced larger debt buybacks aimed at containing borrowing costs, before giving back more than half of those gains a day later amid concerns that the US government’s plan may provide only a temporary solution. The local currency also remained under longer-term pressure due to wide interest rate differentials, mounting fiscal concerns and elevated energy and import costs.