Yen reaches seven-month high on bets the BOJ will raise rates

The yen climbed to a near seven-month high on Tuesday as expectations grew that the Bank of Japan could raise interest rates next week, forcing traders who had bet against the currency to retreat.

The yen strengthened as far as 152.89 per dollar, its strongest level since February and above the levels reached during Japan’s July intervention. It later pulled back to about 154 in London morning trading. The currency has gained roughly 4% from around 160 per dollar early last week.

Traders and analysts pointed to several forces behind the shift, including expectations of faster BOJ tightening, possible repatriation by Japanese investors, the unwinding of carry trades and political pressure from the United States. Dominic Bunning, head of G10 foreign-exchange strategy at Nomura in London, said, “It seems more like it's a market-driven flow, possibly investors starting to think much more about the BOJ turning more hawkish at the next meeting.”

“

It seems more like it's a market-driven flow, possibly investors starting to think much more about the BOJ turning more hawkish at the next meeting.

Markets largely expect the central bank to lift rates by 25 basis points to 1.25% at its September 17-18 meeting. Finance Minister Satsuki Katayama said Japan and the United States remained aligned on currency markets and would continue close communication to support orderly foreign-exchange movements.

Attention is also turning to U.S. inflation data, the last major data release before the Federal Reserve’s September 15-16 meeting. Traders are pricing about a 60% chance of a U.S. rate hike this month. The dollar index stood at 98.93, while the euro traded near $1.1615. Oil prices remained near a six-week high, with Brent crude futures firmly above $99 a barrel, as tensions in the Gulf raised concerns about inflation.

“

But it's going to be quite challenging for the BOJ to hike faster than the market has priced in or to a higher terminal rate.