The Japanese yen held near a seven-month high against the dollar on Wednesday, as a surge in oil prices above $100 a barrel and a widening Middle East conflict put global investors on edge ahead of critical central bank meetings next week.
The dollar was down 0.4% at 153.40 yen in New York trading, not far from Tuesday's low of 152.89, the strongest level for the Japanese currency since February. The greenback has come under sustained pressure from the yen's sharp gains over the past week, which have forced a rapid reassessment of the popular carry trade that uses cheap yen funding to buy higher-yielding assets elsewhere.
The yen has climbed roughly 4% in September alone, making it the best-performing major currency this month. The rally has been broad-based, extending beyond the dollar to gains against the euro, sterling, and carry-trade targets such as the Mexican peso and Turkish lira.
"The main story here is that the U.S. policy premium is putting a cap on the dollar's advance and we have the yen strengthening with the support of the U.S. Treasury," said Kevin Ford, FX and macro strategist at Convera.
Brent crude futures rose as much as 3.5% to top $100 a barrel for the first time since late July, after Iranian-backed Houthis in Yemen struck several Saudi Arabian cities and U.S. forces hit multiple Iranian oil tankers. Tehran also attacked a U.S. base in Jordan, deepening the involvement of American allies in a conflict that has now dragged on for more than six months.
The escalation has revived concerns that higher energy costs will keep inflation elevated and complicate the policy path for the Federal Reserve, which is weighing a possible rate hike at its September 15-16 meeting. Markets are pricing a roughly 60% chance of an increase following last week's stronger-than-expected U.S. payrolls report.
"For now, higher oil and yields may help limit USD downside, but we suspect a more decisive move will require confirmation from the upcoming inflation data," OCBC strategists said in a note. The U.S. consumer price index report is due Friday.
The dollar trimmed some losses after the U.S. Treasury Department said it would triple the size of its long-dated bond buyback operation on Thursday, purchasing up to $6 billion in securities. While the figure was three times the $2 billion originally signaled to investors, it fell short of some expectations that the operation could be expanded to between $8 billion and $10 billion.
That disappointment pushed U.S. Treasury yields higher, with the 10-year note climbing to 4.8528%. The dollar subsequently recovered to trade between 153.10 and 153.80 yen, while the euro slipped from $1.1654 to $1.1621.
The dollar index, which tracks the greenback against six major peers, was flat at 98.80, near its lowest level in almost two weeks.
Treasury Secretary Scott Bessent on Tuesday issued a direct challenge to traders betting against the yen, an extraordinary move following the historic joint U.S.-Japanese intervention in late July that sought to strengthen the currency and deter Tokyo from selling U.S. Treasuries to fund the operation.
"I am the House now, so when we intervene with the Japanese yen, I have pretty good insight into what the Japanese, what the Bank of Japan is going to do, what Japanese policymakers are going to do. And you can bet against me if you want," he said during an event at Southern Methodist University's Cox School of Business.
Kathleen Brooks, research director at XTB, said the comments, while unconventional, reflect a genuine policy commitment. "The U.S. will do what it takes to protect its Treasury market and prop up the yen," she said.
The intervention in late July was massive by historical standards. Tokyo spent the equivalent of 15.4 trillion yen, or about $96.4 billion, supporting the currency, with part of the operation conducted jointly with Washington. Japan's foreign securities holdings fell a record $87.8 billion in August, close to the scale of the intervention, as officials liquidated foreign assets to help finance the effort.
Traders widely expect the Bank of Japan to raise interest rates by 25 basis points to 1.25% at its September 17-18 meeting. The market-implied probability of a hike has reached 100% in overnight index swap pricing, according to analysts, meaning the decision itself is unlikely to shock markets the way the BOJ's move did in July 2024.
That earlier episode triggered a violent unwind of yen carry trades that sent Japan's Nikkei 225 plunging 12.4% on August 5, 2024, with global equities following sharply lower. The question now is whether Governor Kazuo Ueda will reinforce hawkish signals that could drive the yen even higher.
"Fair value for the yen is in the 140s in our estimation and a further move toward that area should not entirely come as a surprise after what has clearly been an overshoot to the side of excessive yen weakness," said Aninda Mitra, head of Asia macro and investment strategy at BNY Investments.
Despite the yen's rapid appreciation, analysts in Seoul and Tokyo argued that a repeat of the 2024 carry-trade shock is unlikely. Kim Jae-seung, a researcher at Hyundai Motor Securities, noted that speculative net short positions in the yen are now roughly half the level seen before the 2024 unwind, partly because the July intervention forced many shorts to cover.
"The market has already priced in the possibility of two rate hikes by the Bank of Japan this year," Kim said. "Compared to the 2024 liquidation, speculative net selling of the yen is at half the level, and these short positions were already reduced once following the late-July joint intervention."
Another key difference is the pace of narrowing in the U.S.-Japan rate differential. In 2024, the gap between two-year government bond yields compressed by about one percentage point in just three months, accelerating the carry-trade unwind. This time, both central banks are expected to tighten simultaneously, keeping the spread relatively stable. The Fed's implied probability of a hike this month stands at around 60%.
Moon Da-eun, a researcher at Korea Investment & Securities, cautioned that a sharp yen appreciation could still occur if the Fed holds rates while the BOJ and European Central Bank hike. "If the Fed freezes and the BOJ and ECB raise rates, dollar weakness could widen or the yen could strengthen further," she said.
The euro was little changed at $1.1628, near a two-week high, ahead of a widely expected rate increase from the European Central Bank on Thursday. Sterling traded at $1.3546 after retreating from a session high of $1.3566.
The Canadian dollar held steady at C$1.377 per dollar despite another escalation in trade tensions after the U.S. government banned imports of a broad range of Canadian goods, including alcoholic beverages, motorcycles, and dairy products. Canada's retaliatory tariffs on U.S. goods took effect just after midnight on Tuesday.
China's renminbi traded near 3½-year highs against the dollar, supported by better-than-expected inflation data and accelerating export growth. The Australian dollar strengthened 0.1% to $0.722, while the New Zealand dollar gained 0.16% to $0.5862.
Investors now turn their attention to Friday's U.S. inflation report, which will be the final major data point before the Fed's decision and could determine whether the dollar's recent weakness extends or reverses.
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