New York and Singapore, Jan 26 - The yen strengthened markedly in early trading on Monday, putting broad downward pressure on the U.S. dollar as market participants monitored the prospect of official intervention and pared back dollar positions ahead of a closely watched week of central bank activity.
Japan's currency climbed almost 1% to hit 154.22 per dollar, a two-month high. The euro reached a four-month peak of $1.1875 and was last quoted at $1.1858. Activity was muted by public holidays in Auckland and Australia, concentrating attention on the Tokyo market open, which falls around midnight GMT.
Tokyo's session followed remarks from Japan's prime minister on Sunday that her government would take "necessary steps" against speculative market moves. That comment, combined with a large one-day yen gain on Friday - its biggest against the dollar in nearly six months - helped set the scene for renewed strength in the currency. The Friday move included spikes during late Asia trading and again during the New York session.
A source told Reuters that the New York Federal Reserve had checked dollar/yen rates with dealers, a step markets interpret as a precursor to intervention. The rush to close short yen positions has left the currency roughly 3% stronger than Friday's low.
"Rates being checked on Friday and then stronger talk over the weekend have all contributed," said Nick Twidale, chief market strategist at ATFX Global in Sydney.
Traders are also attuned to the potential involvement of U.S. authorities. "The involvement of the Fed also has traders on edge," said Eugene Epstein, head of trading and structured products at Moneycorp in New Jersey, suggesting a joint U.S.-Japan approach could increase the odds of successful intervention.
The dollar's retreat spilled into other currencies. Sterling strengthened to a four-month high, rising about 0.3% to a peak of $1.3680. The Australian dollar climbed 0.5% to $0.6938, and the New Zealand dollar moved up to $0.5977.
"The dollar has been fragile anyway, but the gain in the yen has been the precipitating trigger for the market to sell it across the board," said Marc Chandler, chief market strategist at Bannockburn Capital Markets in New York. He added that a range of events in the United States - including protests related to a recent Minnesota shooting and the forthcoming announcement of a Fed chair nominee - were contributing to market anxiety.
U.S. President Donald Trump said on Thursday he would soon name his pick for the next Federal Reserve chair to replace Jerome Powell. Over the weekend, Mr. Trump said he would impose a 100% tariff on Canada if it proceeded with a trade deal with China. Canadian Prime Minister Mark Carney said Canada respects commitments under the United States-Mexico-Canada trade agreement not to pursue free trade agreements with non-market economies.
The Federal Reserve is set to announce its interest rate decision on Wednesday. Markets expect policymakers to leave rates unchanged, but anticipate officials will indicate a path toward easing during the year - with roughly 50 basis points of cuts priced in for the year.
Other central banks are also due to act this week. The Bank of Canada and Sweden's Riksbank are widely expected to keep interest rates on hold, and Singapore is anticipated to maintain its current monetary policy stance.
Market strategists pointed to a rising U.S. risk premium as investors question the direction of U.S. policy. "USD risk premium continuing to rise as investors balk at U.S. policy direction," said Jason Wong, senior market strategist at BNZ in Wellington.
With thin liquidity ahead of multiple central bank decisions and heightened political noise, currency markets entered the week vulnerable to outsized moves. Traders and policy watchers will be watching Tokyo and U.S. developments closely for signals that could prompt coordinated action or further volatility.