Yen Strengthens Past ¥140 Against Dollar as Traders Anticipate Central Bank Rate Decisions

The Yen's Remarkable Surge

Japan's yen has strengthened past ¥140 to the dollar for the first time since July 2023, driven by expectations of diverging moves by US and Japanese central banks. The yen touched ¥139.56 against the dollar on Monday, solidifying its status as one of the best-performing currencies among major economies in the Asia-Pacific region over the last two months.

Market Expectations Influence Currency Movements

• The yen has appreciated by 13.5% against the dollar since mid-July.
• Investors anticipate the Federal Reserve may begin cutting interest rates from a 23-year high, while the Bank of Japan is expected to raise its benchmark lending rate.
• The dollar index fell by 0.5% against a basket of major currencies this week.

According to Chandresh Jain, an Asia rates and FX strategist at BNP Paribas, “It’s all coming from interest rates right now.” Market adjustments reflect expectations of rate cuts by the US Fed alongside projected hikes from the Bank of Japan.

Impact of Trading Conditions and Economic Outlook

The sharp move in the yen occurred amid light trading activity due to a national holiday in Japan. However, other Asia-Pacific currencies also gained against the US dollar, with the Australian dollar rising by 0.5% and the Thai baht by 0.3%.

Precautions from Economists

1. Ryota Abe from Sumitomo Mitsui warned that holiday speculators could distort trading metrics.
2. Abe estimates the yen might close the year at ¥135 to the dollar, a level not seen since May last year.

Analysts predict the Fed is likely to cut rates at its next meeting, with mixed opinions on the extent of the cut. While traders expect the Bank of Japan to keep rates steady, over half of surveyed analysts foresee a rate increase by year-end.