Aug 6 2024: On Tuesday, the Japanese yen steadied, while the Swiss franc also softened, marking a reversal of some recent significant market movements and signaling a return to calm.
The dollar was last trading at 144.75 yen, up 0.3% on the day. This was the first instance this month where the dollar strengthened against the yen, though it remains down by 10 yen over the past week.
This shift came amid a broader market reassessment, with Japan’s Nikkei index rebounding by 10% on Tuesday after a 12% drop the previous day. European shares were also attempting to recover. “Markets seem to have realized they may have overreacted, which is why we’re seeing the dollar rise and the dollar/yen rate climb,” said Nick Rees, a currency analyst at Monex Europe.
Recent yen gains were fueled by increased market volatility, which prompted investors to exit popular carry trades, compounded by the Bank of Japan’s interest rate hike on Friday. This, coupled with weaker-than-expected U.S. job data and disappointing earnings from major tech companies, triggered a global equity sell-off, further driving the unwinding of carry trades.
The Swiss franc also weakened on Tuesday, with the dollar up 0.45% to 0.85545 francs. The franc, another favored currency for carry trades, had strengthened significantly since mid-July due to the unwinding of these trades and safe-haven flows observed on Monday.
The dollar also regained ground against the euro and the pound. The euro was down 0.24% at $1.0926, having reached a seven-month high of $1.1009 during Monday’s market turmoil. Sterling was down 0.3% at $1.274.
Currency market movements are also being influenced by traders’ expectations regarding U.S. Federal Reserve policy. Current expectations are for 110 basis points of easing this year, with an 80% chance of a 50 basis point cut in September. On Monday, traders had fully priced in a 50 basis point cut.
U.S. central bank officials have pushed back against the idea that weaker July job data signals an imminent recession, though they have indicated that rate cuts may be necessary to prevent such an outcome.
The Australian dollar was flat at $0.6492 after earlier rising in response to comments from Reserve Bank of Australia Governor Michele Bullock, who suggested that rate cuts are still some time away. The central bank held interest rates steady on Tuesday but reiterated its commitment to managing inflation through its monetary policy.