The yen jumped to a two-month high against the U.S. dollar on Tuesday as leveraged investors trimmed short positions to reassess the risk of inflation, recession fears and increasing market volatility.
Markets in Tokyo opened on Tuesday with the dollar/yen rate at around 130.5 yen, a level that was significantly lower than the 133 yen where it traded the previous trading day. On Wednesday morning, the pair was trading at 133.
Dealers in Tokyo attributed the move to US-based funds backing out of their bets that the yen would remain historically weak into the fall.
A combination of lower US bond yields and profit-taking from long dollar positions has recently given the yen support against the dollar.
But analysts said the big question was whether the yen’s strengthening against the US dollar marked a genuine inflection point or a “fake”.
With relatively light summer trading volumes, the yen’s explosive rally has lifted it about 4.5% against the US dollar over the past seven days. The Japanese currency’s sudden rise reverses a series of declines that began in early March at the 114 yen level.
In a statement, Fed Chairman Jay Powell said his decisions will be more data-driven from here on out, and that introduces much more two-way risk to how the dollar-yen will move. He added that the sudden rise in the yen could be reversed next week by the release of US inflation data.
What Powell has done is introduce the possibility of more dollar-yen volatility. By definition, if the Fed is going to depend more on data, investors will have to move more nimbly whenever data comes out.
Other analysts said that while last month’s level of 139 yen to the dollar was likely to mark the dollar’s peak against the yen, it was too early to declare a clear turning point because of doubts about the timing and severity of the recession in USA.
Dealer Borislav Andonov