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NEW YORK/LONDON: The yen fell against the dollar on Monday after last week’s volatility, with currency market trading quieter as investors weighed the likelihood of a sharp interest rate cut by the Federal Reserve next month ahead of a slew of U.S. economic data.
Markets are finally getting some respite after a turbulent week that saw a massive sell-off in foreign exchange and equity markets amid concerns about the U.S. economy and the Bank of Japan’s hawkish stance.
Markets were relatively quiet last week as stronger-than-expected U.S. jobs data released on Thursday led to a reduction in bets that the Federal Reserve will cut interest rates this year.
“U.S. stocks have recovered pretty well from profit-taking, and that could give the dollar some boost because stocks are doing better and the economy isn’t too bad,” said Joseph Trevisani, senior analyst at FXStreet.com in New York. “We’re getting back to a rational view on the economy.”
Still, investors expect the Fed to cut rates by 100 basis points by the end of the year, according to CME Group’s FedWatch tool, and U.S. producer and consumer price data due on Tuesday and Wednesday could change that view.
“There’s a ton of data coming out around the world that will have an impact on monetary policy decisions,” said Sean Osborne, chief foreign exchange strategist at Scotiabank in Toronto.
“I think against the backdrop of a calmer stock market, we’re seeing a little bit of a repricing of expectations for a rate cut from the Fed, and that’s helping to stabilize the dollar to some extent.”
The dollar was trading at 147.74 yen, up 0.8%, and was also up nearly 0.5% against the Swiss franc at 0.8692.
The euro edged up 0.04% to $1.0918, with the dollar index slightly higher at 103.29. Sterling was flat at $1.2762.
A week ago, the euro rose to $1.1009 against the dollar for the first time since January 2.
Carry trade unwinding
Markets, particularly in Japan, were shaken last week by the unwinding of the popular yen carry trade, which involves borrowing yen at a low cost and investing in other currencies and assets that offer higher yields.
Due to Japanese intervention, the Bank of Japan’s interest rate hikes and the subsequent unwinding of yen funding carry trades, the dollar-yen exchange rate suffered a sharp sell-off between July 3 and August 5, falling by 20 yen at one point.
Data released by the U.S. Commodity Futures Trading Commission and the London Stock Exchange on Friday showed that leveraged funds’ net short positions on the yen shrank to the smallest level since February 2023 in the latest week.
Last Monday, the yen hit 141.675 per dollar, its highest level since January 2. So far this year, the yen is still down about 4% against the dollar.
JPMorgan analysts raised their forecast for the yen to 144 per dollar in the second quarter of next year, saying this means the yen will consolidate in the coming months.
“Carry trades have wiped out year-to-date gains; we estimate 65%-75% of positions have been liquidated,” they said in a note on Saturday.
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