The Japanese yen traded at seven-month highs against the dollar on Wednesday, keeping the greenback under pressure as Brent crude broke above $100 a barrel on a widening Middle East conflict. Traders are now weighing the move against upcoming U.S. inflation data and central bank meetings in Washington and Tokyo next week.
The Japanese yen traded at seven-month highs on Wednesday, pinning the dollar down 0.4% on the day at 153.38 yen, just shy of Tuesday's seven-month high of 152.89. The move came as traders grappled with oil prices breaking above $100 a barrel amid a widening war in the Middle East.
Oil breaks $100 as Middle East conflict widens
Brent crude futures rose nearly 3% to top $100 a barrel for the first time since late July, after Iranian-backed Houthi forces in Yemen struck several Saudi Arabian cities. American forces hit multiple Iranian oil tankers, and Tehran struck a U.S. base in Jordan, further widening the conflict.
The escalation lands ahead of U.S. inflation data due Friday, which will set the stage for central bank meetings next week in the U.S. and Japan. The dollar fell modestly, and some analysts attributed the weakness to the yen's rapid rise over the past week and to investors positioning ahead of the meetings.
OCBC strategists said the Middle East escalation kept Federal Reserve policy implications from higher energy prices in focus, particularly after last week's strong U.S. payrolls report revived expectations of a rate hike next week. According to OCBC strategists: "higher oil and yields may help limit USD downside", though they said a more decisive move requires confirmation from the coming inflation data.
Yen's rally reshapes carry-trade bets
The yen's 4% rise so far this month has reshaped calculations for the popular carry trade, where investors borrow cheaply in yen to fund purchases of higher-yielding currencies. The Japanese currency has strengthened broadly, including against the euro and the pound, as well as against carry-trade targets such as the Mexican peso and the Turkish lira.
The move stems from expectations of faster Bank of Japan tightening, the prospects of Japanese investors repatriating overseas funds, and pressure from Washington for a stronger yen. Traders widely expect the BOJ to raise rates by 25 basis points at its September 17 and 18 meeting, though the rally's durability hinges on whether Governor Kazuo Ueda follows through with hawkish comments.
Bessent dares traders to bet against the yen
Treasury Secretary Scott Bessent on Tuesday dared traders to bet against the yen, following the historic joint U.S.-Japanese intervention in late July that aimed to support the currency and deter Tokyo from selling U.S. Treasuries to fund the move. The odds of a Federal Reserve rate rise next week now stand at 60%, the other wildcard weighing on the dollar.
Source: Investing.com
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