Yen strengthens past ¥140 against dollar ahead of rate decisions

Japan’s yen has strengthened past ¥140 to the dollar for the first time since July 2023 as traders expect diverging moves by US and Japanese central banks this week will weaken demand for the American currency.

The yen touched ¥139.56 against the dollar on Monday, extending its position as one of the best-performing currencies among large economies and Asia-Pacific nations in the past two months.

The Japanese currency has risen 13.5 per cent against the dollar since mid-July as investors expect the Federal Reserve to begin cutting interest rates from a 23-year high, just as the Bank of Japan begins raising its benchmark lending rate and winding down purchases of government bonds after years of ultra-loose policy. The dollar index fell 0.5 per cent against a basket of major currencies on Monday.

“It’s all coming from interest rates right now. The market is pricing more US Fed cuts and hiking from the Bank of Japan,” said Chandresh Jain, Asia rates and FX strategist at BNP Paribas.

The sharp move in the yen came in light trade in Tokyo due to a national holiday. However, other Asia-Pacific currencies also rallied against the dollar on Monday, including the Australian dollar, up 0.5 per cent, and the Thai baht, up 0.3 per cent.

Ryota Abe, an economist in the Asia-Pacific division at Sumitomo Mitsui Banking Corporation, cautioned that holiday “speculators” had taken advantage of the “thin” trading. However, he said the yen could end the year at ¥135 to the dollar, a level not seen since May last year.

“The direction of the dollar/yen is surely downward in the near future with some volatility,” he said.

The Fed is widely expected to cut rates in the US on Wednesday, with the market divided over whether it will go for a quarter percentage point or half percentage point cut. Traders predict the BoJ will keep rates steady on Friday but more than half of analysts polled by Reuters forecast one quarter percentage point rise by the end of the year.

The stronger yen has come in spite of a turbulent August, when fears over the health of the US economy shook markets and led to the partial unwind of the dollar-yen carry trade, through which international investors borrowed in yen to buy higher-yielding or riskier assets. In the aftermath the yen weakened to close to ¥150 to the dollar.

Jain said they expected the yen to end next year at ¥131 to the dollar, but warned there were “quite a lot of risks”, including the outcome of the US election and the risks of tariff increases.

He added that foreign financial institutions were also still being forced to sell parts of their portfolios in response to the unwinding of the yen carry trade. “I don’t think we’ve seen a complete collapse of that trade yet,” Jain said.