July 29 2024: The yen advanced on Monday, reversing earlier losses, as sentiment remained fragile following the Japanese currency’s strongest weekly rally since late April. This rally was triggered by a U.S. tech-led stock downturn, which increased demand for safe haven assets.
Traders are now anticipating policy decisions from the Bank of Japan (BOJ) and the Federal Reserve, both scheduled for Wednesday, to provide further direction. Rising speculation about a potential BOJ interest rate hike this week has supported the yen, with the Fed also expected to set the stage for a rate cut in September.
Investors are also cautious of further geopolitical tensions, with Israel considering a response to a deadly rocket strike in the Israeli-occupied Golan Heights, an attack attributed to the Lebanese armed group Hezbollah by both Israel and the United States.
The dollar last traded down 0.14% at 153.51 yen after dipping as much as 0.49% to near 153 earlier. Initially, the dollar had gained up to 0.36% as the global equity market’s recovery from Friday extended into Monday in Asia, with Japan’s Nikkei stock average rising more than 2%.
On Thursday, the dollar fell as low as 151.945 yen for the first time since May 3, ending the week down 2.4%.
“The rally seemed to stall” in the dollar-yen exchange rate following the news from Israel, though the cause was not clear, said Shinichiro Kadota, a currency and rates strategist at Barclays in Tokyo. “Sentiment remains fragile.”
Ultimately, “U.S. equities are still the key,” Kadota added. “Market moves have been led by U.S. equities, and we need to see if things stabilize there.”
This week’s U.S. earnings calendar features major companies including Amazon, Apple, Meta, and Microsoft.
Currency traders also face not just the BOJ and Fed decisions on Wednesday, but also the Bank of England’s decision on Thursday.
Speculation has increased that the BOJ will raise interest rates on Wednesday and significantly reduce its monthly bond purchases, with plans for quantitative tightening (QT) expected to be outlined at this meeting, as promised during its previous session last month.
Elsewhere, the Fed is widely expected to keep rates unchanged this week, but to cut them by a quarter point at the following meeting in September.
“USD/JPY was overvalued but momentum is strongly against this currency pair now,” said Kristina Clifton, senior economist and chief currency strategist at Commonwealth Bank of Australia.
The Federal Open Market Committee decision is the “big event” and risks to the dollar-yen pair are “asymmetric,” she said.
“Any hints of loosening by the FOMC could pull USD/JPY down significantly, but a hawkish FOMC will probably have little impact,” she added.
The dollar index, which measures the currency against the yen, euro, sterling, and six other major peers, fell 0.1% to 104.27.
The euro eased 0.06% to 166.76 yen, and remained steady at $1.0858.
It was flat at 84.35 British pence, staying close to the high of 84.48 pence from Friday, the strongest since July 10.
Sterling added 0.07% to $1.2875.
Markets view the odds of a Bank of England rate cut on Thursday as evenly split. Elsewhere, the Australian dollar gained 0.07% to $0.6562, attempting to recover from Friday’s low of $0.65105, a level not seen since the start of May.
Leading cryptocurrency Bitcoin advanced 3.35% to $69,700, supported by positive comments from Republican presidential candidate Donald Trump, who told a Bitcoin conference on Saturday that the U.S. must dominate the sector to stay ahead of China.