Asian currencies traded mostly stronger on Wednesday as the Japanese yen held near its strongest level since February, keeping downward pressure on the U.S. dollar. The pass-through from higher oil prices and renewed hostilities in the Middle East added to concerns about upward pressure on inflation globally.
The USD/JPY pair was trading around 153.65, after the yen had strengthened to 152.89 on Tuesday, its firmest showing since February. The yen has gained roughly 4% so far in September.
Market participants attributed the move in part to expectations that the Bank of Japan will tighten policy sooner than previously anticipated, to the prospect of Japanese investors bringing overseas capital back home, and to pressure from U.S. authorities for a stronger yen. At the same time, the U.S. dollar index hovered near 98.15, close to its lowest level in almost two weeks, as traders positioned ahead of Friday's U.S. inflation report and the upcoming Fed and BOJ meetings.
Oil, conflict and inflation risks
Brent crude futures rose about 1.5% to $99.37 a barrel as the conflict in the Middle East widened. The report said Iranian-backed Houthi fighters in Yemen struck multiple cities in Saudi Arabia, while U.S. forces struck several Iranian oil tankers and Iran targeted a U.S. base in Jordan. The fighting has persisted for more than six months and is raising concerns about potential disruptions to energy supplies.
Higher crude prices could keep inflation elevated and complicate rate decisions for central banks worldwide. The dollar's softness has also been linked to the yen's rapid appreciation, creating a feedback loop that investors are watching closely. Traders were awaiting the U.S. inflation reading on Friday, the last major datapoint before the Federal Open Market Committee meets on Sept. 15-16.
Yen rally: BOJ bets and repatriation flows
Traders widely expected the BOJ to lift rates by 25 basis points at its Sept. 17-18 meeting, while the trajectory for subsequent hikes depends on whether Governor Kazuo Ueda signals a persistently hawkish stance. The yen's ascent has also been supported by expectations that Japanese investors may repatriate overseas funds back to Japan.
Japan intervened heavily to support the currency over the past month. Tokyo spent the equivalent of 15.4 trillion yen, or about $96.4 billion, in support operations, with part of that action conducted jointly with the United States. In August, Japan's foreign securities holdings fell by a record $87.8 billion - roughly the same scale as the intervention - as authorities used foreign assets to help finance the operations. That strategy has drawn attention in Washington because of concerns that sales of U.S. Treasury securities could push up long-term U.S. yields.
Other Asian currencies and data
The yuan remained near a 3 1/2-year high. The USD/CNH pair traded at about 6.7051 while USD/CNY was around 6.7076. China reported that consumer prices rose 0.8% year-on-year in August, up from 0.5% in July, while producer prices increased 3.8% year-on-year, accelerating from 3.5%. Much of the increase in headline inflation reflected higher energy costs connected to Middle East tensions, though core CPI only rose to 1%, highlighting still-weak domestic demand.
The South Korean won also stayed near multi-year strength after a sharp rally. USD/KRW was trading around 1,340.80. In a Bloomberg interview cited in the report, former Bank of Korea Governor Rhee Chang Yong said South Korea is better placed to withstand currency volatility because it has moved from being a net international debtor to a creditor.
Elsewhere in the region, AUD/USD was trading up 0.12% at $0.7225, just below a four-month high, while NZD/USD rose 0.16% to $0.5862. USD/INR was up about 0.3% at 94.76, USD/SGD was near 1.2662, and USD/MYR gained 0.30% to 4.0691, with the Malaysian ringgit remaining under pressure from capital outflows.
Market positioning and the calendar
Currency markets were positioned for a potentially busy stretch of data and central bank decisions. Traders noted that recent U.S. labor market strength could force the Fed to balance a firmer employment backdrop against incoming inflation data when it meets mid-month. Meanwhile, attention on the BOJ's policy path, signs of repatriation flows from Japan, and geopolitical developments tied to energy markets were cited as drivers of near-term FX moves.
Investors and policymakers will likely continue to monitor oil prices, the trajectory of U.S. inflation, and statements from central banks for signals about the path of interest rates and the impact on foreign exchange markets.