The yen extended gains on Thursday after a sudden burst higher in the previous session, though traders stopped short of attributing the move to intervention by Japanese authorities and pointed instead to rising bets on Bank of Japan rate hikes.
The dollar dropped 1.5% to 156.17 yen, after a 0.9% fall the day before, leaving the Japanese currency at its strongest in a month.
Markets were on alert for any official intervention from Japan, though analysts suggested the move was more orderly than is typically the case when Tokyo steps in.
The Japanese currency's rally was broad-based, with the euro sliding more than 1% to 181.62.
The renewed yen strength follows hawkish comments from Bank of Japan board member Hajime Takata, who said on Wednesday the central bank should conduct interest rate hikes nimbly to counter intensifying inflationary pressures, rather than adhere to a fixed semiannual pace anticipated by markets.
The "remarks are the strongest messaging we've heard from the board and reintroduce the idea of an expedited rate hike trajectory," Citi said in a client note, adding that the market was taking Takata's comments "more seriously".
A Bank of Japan rate hike this month is nearly fully priced in by markets.
Since a rare joint yen-buying intervention between the U.S. and Japan on July 31, the yen has struggled to find lasting support, coming under pressure from still-wide interest rate differentials, fiscal worries and a renewed spike in energy prices.
That means all eyes are on further policy changes.
Chris Turner, global head of markets at ING, said a Federal Reserve rate hike in September — which markets are increasingly pricing in after Chair Kevin Warsh's hawkish speech last week — would likely limit the dollar's fall against the yen.
"Any sustainable turn lower in USD/JPY now probably requires a much more hawkish Bank of Japan and some new initiatives to encourage domestic investment in Japan," he said.
Markets await Friday's U.S. nonfarm payrolls report
The focus now shifts to Friday's U.S. nonfarm payrolls report, where analysts forecast an increase of 56,000 in jobs, following July's shock drop of 23,000, with unemployment holding at 4.1%.
A much weaker outcome would probably be needed to greatly lessen the risk of a September rate hike from the Federal Reserve, with markets now pricing in a 61% chance of a move.
Dollar softer ahead of U.S. payrolls; Swiss franc strengthens
In the broader market, the yen strength left the U.S. dollar on the back foot, with the euro up 0.1% to $1.1602. Sterling inched up from a three-week low and last bought $1.3493.
The bigger mover in Europe was the Swiss franc, which strengthened after data showed a jump in inflation to 0.8% year-on-year, up from 0.4% in July, raising the possibility that the Swiss National Bank may raise interest rates away from zero.
The dollar fell 0.44% to 0.8092 francs, and the euro shed 0.3% to 0.9385 francs.
Elsewhere, the New Zealand dollar rose 0.3%, having slid 0.7% on Wednesday following a dovish hike from the central bank, while the Canadian dollar extended overnight gains after the Bank of Canada held rates on Wednesday but signalled its readiness to tighten policy to rein in inflation.
FXY•
