The dollar hovered near a seven-month low against the yen on Wednesday as oil prices climbed above $100 a barrel amid an escalating Middle East conflict. The yen's rally, up 4% this month, is squeezing carry trades funded in the Japanese currency, while investors position for Federal Reserve and Bank of Japan meetings next week.
Dollar slips as yen extends its rally
The dollar fell 0.4% to 153.40 yen on Wednesday, not far from Tuesday's seven-month low of 152.89. The dollar index, which tracks the currency against six major peers, was flat at 98.80, near its lowest level in almost two weeks.
Kevin Ford, FX and macro strategist at Convera, said the U.S. policy premium is capping the dollar's advance while the yen strengthens with support from the Treasury. But the greenback trimmed some losses after the U.S. Treasury Department said it would triple the size of its long-dated buyback operation on Thursday, purchasing up to $6 billion in bonds.
Yen's rally squeezes the carry trade
The yen has climbed 4% so far this month, challenging the economics of the carry trade, in which investors borrow cheaply in yen to invest in higher-yielding assets elsewhere. The currency has strengthened broadly against the dollar, the euro and sterling, as well as against popular carry-trade currencies such as the Mexican peso and Turkish lira.
Gains reflect expectations of faster Bank of Japan tightening, prospects for repatriation flows from Japanese investors, and pressure from Washington for a stronger yen. Markets widely expect the BOJ to raise interest rates by 25 basis points at its September 17-18 meeting, though further yen gains may depend on whether Governor Kazuo Ueda reinforces hawkish policy signals. Treasury Secretary Scott Bessent on Tuesday dared traders to bet against the yen, following joint U.S./Japanese intervention in late July to support the currency.
Oil tops $100 as Middle East conflict escalates
Brent crude futures rose 3.5%, topping $100 a barrel for the first time since late July, after Iranian-backed Houthi forces in Yemen launched strikes on several Saudi Arabian cities. American forces also struck multiple Iranian oil tankers, while Tehran hit a U.S. base in Jordan, ahead of U.S. inflation data due Friday and central bank meetings next week in the U.S. and Japan.
The euro rose 0.05% to $1.1628, nearing a two-week high, ahead of a widely expected rate hike from the European Central Bank on Thursday. OCBC strategists said the latest 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.
Source: Investing.com
Trading involves risk.
Risk Disclaimer
