Yen holds near seven-month high as US dollar steadies

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. 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 was trading near a nine-month low against the yen at 178.83 per euro. Traders widely expect the BOJ to raise interest rates by 25 basis points to 1.25% at its September 17 to 18 meeting. Oil prices rose to near six-week highs amid increased tensions with Iran, which has threatened to retaliate against US sanctions. The Canadian dollar strengthened after retaliatory US tariffs took effect on Canadian goods. Bank of America analysts led by Adarsh Sinha said reports around public pension fund reallocation and BoJ rate hikes seemed to precipitate a sharp yen rally last week. 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 their view that all policy levers will eventually be employed to support the yen. Marc Chandler, chief market strategist at Bannockburn Global Forex, described the recent price surge as a continuation of last week's short squeeze. "It seems like a continuation of what we saw last week," he said. "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."