Yen Slips as Dollar, Oil Gain

The Japanese yen weakened toward 155 per dollar on Tuesday, declining for a second consecutive session as the dollar strengthened ahead of an expected US Federal Reserve interest rate hike this week. The yen also faced pressure from rising oil prices, which increase import costs for Japan’s oil-dependent economy. Still, the Japanese currency remained near seven-month highs amid expectations for more aggressive monetary tightening by the Bank of Japan, the unwinding of carry trades and signs of increased asset repatriation by domestic investors. The BOJ is widely expected to raise its policy rate to 1.25% on Friday, its highest level since April 1995, as the central bank responds to persistent upside risks to inflation. Markets are also watching for guidance from the BOJ on the potential for another rate hike later this year.

The Japanese yen eased toward 154 per dollar on Monday but remained close to its highest levels since February, supported by expectations for more aggressive policy tightening by the Bank of Japan, the unwinding of carry trades and signs of increased asset repatriation by domestic investors. The BOJ is widely expected to raise its policy rate to 1.25% on Friday, its highest level since April 1995, as the central bank addresses persistent upside risks to prices. Markets are also watching for BOJ guidance on the possibility of another rate hike later this year. Meanwhile, US Treasury Secretary Scott Bessent has repeatedly urged the BOJ to pursue more aggressive policy tightening to prevent excessive yen weakness. Investors also monitored developments in the Middle East as oil prices surged again following Saudi Arabia’s shutdown of the critical East-West pipeline, which bypasses the Strait of Hormuz.

The Japanese yen weakened past 154 per dollar on Friday, retreating from near seven-month highs as the dollar recovered after data showed US producer inflation accelerated in August, bolstering bets for a Federal Reserve rate hike next week. The yen also faced pressure from surging oil prices that kept inflation risks elevated, with the US and Iran showing no signs of backing down from the war. Meanwhile, data showed Japanese producer inflation climbed 7.6% in August, reinforcing expectations for a Bank of Japan rate increase this month. Sentiment among large manufacturers also improved sharply in Q3, reaching its strongest level since Q4 2021 amid robust government support measures. Still, the yen remained up more than 3% so far this month, supported by expectations for more aggressive BOJ policy tightening, the unwinding of carry trades and increased capital repatriation.