Karen Brettel and Amanda Cooper
NEW YORK/LONDON (Reuters) – The yen rose to a nearly four-week high against the U.S. dollar on Friday, raising speculation that Japanese authorities may intervene for a second straight day to support the currency.
The Japanese yen, which had been languishing near its lowest level in nearly 38 years, began its rise on Thursday after data showed that the U.S. consumer price index fell in June, raising the possibility that the Federal Reserve may cut interest rates as early as September.
The move came after data came out Friday showing U.S. producer prices rose modestly in June.
“If they intervened yesterday, they’re likely to intervene today,” said Steve Englander, head of global G10 currency research and North American macro strategy at Standard Chartered Bank in New York. “I think keeping the market off balance is a good strategy.”
But “stops may be in the cards,” Englander added, referring to closing positions that were bet against the yen following losses.
Daily operations data released by the Bank of Japan on Friday suggested the central bank bought between 3.37 trillion and 3.57 trillion yen ($21.18 billion to $22 billion) on Thursday, less than three months after its last yen entry into the market.
Friday’s moves could be the result of intervention or an interest-rate check, said James Malcolm, head of FX strategy at UBS in London. The Bank of Japan occasionally calls dealers to ask about interest-rate levels, which could signal possible intervention and itself spark market moves.
“They need to change their strategy to make the market nervous and show they mean business. Yesterday’s losses don’t seem to have been too much. This will increase the chances of finishing the week near the lows, putting further technical pressure on the dollar/yen cross,” he said.
“You don’t need to do a huge promotion,” said Lou Bryan, market strategist at DRW Trading in Chicago. “You just need to make a few phone calls to make sure they’re well known.”
Tokyo’s top foreign exchange official, Masato Kanda, declined to comment on Friday on whether there had been any intervention or rate checks, but added that one-sided speculative moves could not be ignored.
The dollar briefly hit 157.3 yen, its lowest level since June 17, before closing at 157.87 yen, down 0.58%.
Tokyo intervened in late April and early May, spending about 9.8 trillion yen ($61.55 billion) to support the currency. A report from the Finance Ministry is due to be released at the end of the month to confirm how much was spent on intervention.
But the yen has since surpassed those levels, weighed down by the wide gap between U.S. and Japanese exchange rates, hitting a 38-year low of 161.96 yen to the dollar last week.
This gap has created a very lucrative trading opportunity, known as the carry trade, where traders borrow yen at low interest rates and invest in dollar-denominated assets to earn higher returns.
A Federal Reserve rate cut would make the trade less attractive.
“The Fed will cut interest rates in September, and combined with the Bank of Japan’s rate hike, the interest rate gap between Japan and the United States will likely narrow,” said Takahide Kiuchi, executive economist at Nomura Research Institute.
“This is expected to reverse the yen’s depreciation trend. This currency intervention will be effective in buying time until then,” he said.
Traders now see a 94% chance that the Fed will cut rates in September, according to CME Group’s FedWatch tool, up from 73% before the CPI release.
About 90% of Japanese households expect prices to rise in a year’s time, the central bank’s quarterly survey showed on Friday, a sign of rising inflation expectations and a possible case for a short-term interest rate hike.
The dollar index, which compares the U.S. currency against six other currencies, fell 0.26% on the previous day to 104.08, its lowest since June 7 at 104.04.
U.S. consumer sentiment fell in July, but inflation expectations over the next 12 months and beyond improved, a survey showed on Friday.
The euro rose 0.37% to $1.0904, hitting its highest level since June 4 at $1.0911.
The pound rose 0.6 percent to a one-year high of $1.2987.
In cryptocurrencies, Bitcoin rose 1.17% to $58,229.
(Additional reporting by Ankur Banerjee in Singapore, Harry Robertson in London and Gertrude Chavez Dreyfuss in New York; Editing by Miral Fahmy, Louise Heavens, Arun Koyyuru and Peter Graff)
