The Japanese yen hovered near a seven-month high on Tuesday, while the dollar steadied against major peers as a renewed rise in oil prices and higher U.S. Treasury yields kept investors cautious.
The yen has gained nearly 5% since last week, driven partly by expectations of faster Bank of Japan policy tightening, the potential repatriation of overseas funds by Japanese investors, the unwinding of carry trades and pressure from Washington.
The currency strengthened to as much as 152.89 per dollar during Asian trading, surpassing levels reached during Japan's July intervention and touching its strongest level since February.
It later gave up some gains and was last up 0.03% at 153.81 per dollar.
"It seems like a continuation of what we saw last week, which was a powerful short squeeze," said Marc Chandler, chief market strategist at Bannockburn Global Forex.
"There still doesn't seem to be much of a sign of official intervention. It seems more to be market adjustments as the yen has been used as a funding currency for carry trades. So there's just a big unwind of that."
Japanese Finance Minister Satsuki Katayama said on Tuesday Tokyo and Washington remain aligned in their approach to currency markets and will continue close communication to ensure orderly foreign exchange movements.
The euro EURJPY was trading near a nine-month low against the yen at 178.83 per euro.
"Reports around public pension fund reallocation and BoJ rate hikes seemed to precipitate a sharp yen rally last week," said Bank of America analysts led by Adarsh Sinha in an investor note.
"While the move was large given the limited signal-to-noise ratio of these reports and no obvious signs of intervention, it is consistent with our view that all policy levers will eventually be employed to support the yen. From here, we think domestic yen buying could accelerate below 155."
Traders widely expect the BOJ to raise interest rates by 25 basis points to 1.25% at its September 17 to 18 meeting.
Euro steady and Canadian dollar rises on tariffs
The euro EUR=EBS was trading largely flat at $1.1628. The European Central Bank is widely expected to raise interest rates on Thursday, as the U.S.-Israeli war on Iran — which is keeping oil prices high and raising inflation — drags on.
The Canadian dollar strengthened 0.23% versus the greenback to C$1.378 per dollar. Canada's retaliatory tariffs on U.S. goods took effect just after midnight on Tuesday after trade negotiations collapsed last month, intensifying an 18-month-old trade war.
The dollar index =USD, which tracks the U.S. currency against six others, was flat at 98.81.
Oil, U.S. data and Fed expectations keep markets cautious
Investors were watching geopolitical tensions in the Gulf and their implications for inflation after Yemen's Tehran-backed Houthis attacked energy facilities and cities in U.S. ally Saudi Arabia, wounding more than 70 people and highlighting the risk of the Iran conflict widening.
Oil prices hovered near a six-week high, with Brent crude futures LCOc1 settling near $98 a barrel. O/R
Market attention is also turning to a series of U.S. economic releases this week, including consumer and producer price data, the final major indicators before the Federal Reserve's September 15 to 16 policy meeting.
Traders are pricing a roughly 60% chance of a Federal Reserve rate hike this month 0#USDIRPR following Friday's stronger-than-expected nonfarm payrolls report.
The yield on benchmark U.S. 10-year notes continued its ascent and was up 2 basis points to 4.804%.
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