The dollar remained relatively stable on Wednesday, leading the yen to retreat from a seven-month peak. Currency markets have regained some stability after the week’s tumultuous start, which saw a significant shakeout in assets driven by recession concerns and a reversal of popular carry trades.
In early trading, the yen was down 1% at 146.43 per dollar, moving away from its recent high of 141.675 reached on Monday. Despite this drop, the yen has appreciated 3% in August and remains significantly higher than the 38-year lows of 161.96 it hit at the beginning of July.
The yen’s recent performance has improved due to strategic interventions by Tokyo in early July and a hawkish stance from the Bank of Japan last week, which prompted investors to exit carry trades. These trades typically involve borrowing yen at low rates to invest in dollar-denominated assets for higher returns.
Market volatility intensified following a weaker-than-expected U.S. job report on Friday and disappointing earnings from major tech companies. This triggered a global sell-off in riskier assets, raising fears of a potential U.S. recession.
Aninda Mitra, Head of Asia Macro and Investment Strategy at BNY Advisors Investment Institute, commented, “The yen undervaluation had become somewhat exaggerated. An adjustment was imminent.”
According to JP Morgan strategists, the recent fluctuations in yen positioning have been among the most significant on record. Their models indicate that as of August 6, 65% of yen shorts have been covered. They suggest that while some yen shorts remain, the volatility in USD/JPY may start to decrease.
On Wednesday, the euro remained relatively stable at $1.092675, while the British pound was trading at $1.26985 in Asian hours, close to a five-week low reached in the previous session. The U.S. dollar index, which measures the greenback against a basket of six currencies, eased to 102.94 but remained above its seven-month low of 102.15 recorded on Monday.
Traders have adjusted their expectations for the Federal Reserve in light of last week’s weak jobs report, now anticipating nearly 105 basis points of easing by year-end. The CME FedWatch tool indicates a 70% chance of a 50 basis point rate cut in September, down from an 85% chance the previous day. Major brokerages also foresee a significant rate cut in the upcoming meeting.
However, some analysts believe the Fed may adopt a more cautious approach. “I think the Fed is following its usual practice, seeking confirmation from multiple data points before making a decision,” said Mitra. “The market, on the other hand, reacted to a single non-farm payroll report and quickly concluded that a rate cut was necessary.”
A Reuters poll of foreign exchange strategists predicts that the dollar may recover some of its recent losses over the next three months, as markets might have overestimated the number of rate cuts expected this year.
In other currency movements, the Australian dollar was up 0.24% at $0.6534 following the central bank’s decision to rule out an interest rate cut for the remainder of the year. Despite this, the Aussie has struggled recently, falling to eight-month lows earlier this week. The New Zealand dollar rose 0.74% to $0.5998, buoyed by strong job data.
