By Laura Matthews
NEW YORK (Reuters) – The yen fell against the dollar on Monday in calmer trading in currency markets as investors weighed the chances of a deep Fed rate cut next month ahead of a slew of U.S. economic data after the volatile moves from last week.
The postponement follows a tumultuous week that started with a massive sell-off in currencies and stock markets, driven by concerns about the U.S. economy and the Bank of Japan’s hawkish stance.
Last week ended on a quieter note as stronger-than-expected US jobs data prompted markets to lower their expectations for Federal Reserve rate cuts this year.
“All they’re really looking at is to see if the inflation story will come back to life with this week’s consumer price index, or if we’ll continue with the new story: is the economy headed for a recession, characterized by what what’s going on with the nonfarm payroll labor market,” said Joseph Trevisani, senior analyst at FXStreet.com in New York.
Still, according to CME Group’s (NASDAQ:) FedWatch tool, investors are pricing in 100 basis points of Fed cuts by year-end, and U.S. producer and consumer prices due Tuesday and Wednesday could change market perceptions.
“We’re looking at which direction the Fed’s attention is going. Right now it’s back to the labor market. That could change if there’s something unexpected in the inflation, CPI numbers, especially if those numbers go up,” Trevisani said . said.
The dollar traded at 147.10 yen, up 0.33%, and was flat against the Swiss franc at 0.8661.
The euro rose 0.16% to $1.0933, while the euro fell to 103.10. Sterling was steady at $1.2763.
A week ago, the euro rose to $1.1009 for the first time since January 2.
CARRY HANDELS DESIGNED
Markets, particularly Japan, were rocked last week by the expiration of the hugely popular yen carry trade, which involves borrowing the yen at a low cost to invest in other currencies and assets that offer higher returns.
The violent sell-off of the dollar-yen pair between July 3 and August 5, fueled by Japanese intervention, a Bank of Japan rate hike and subsequent unwinding of yen-funded carry trades, saw it fall by 20 yen.
Hedge funds’ positions on the Japanese yen shrank last week to the smallest net short position since February 2023, data released Friday from the U.S. Commodity Futures Trading Commission and LSEG showed.
The yen reached its strongest level since January 2 at 141.675 per dollar on Monday. So far this year, the rate is still down about 4% against the dollar.
“Comments from an ex-BoJ official summarizing why the BoJ is unlikely to rush to raise rates again have undermined the JPY,” said Jane Foley, head of FX strategy at Rabobank in London.
“That said, the market is unlikely to return to carry trades as volatility is likely to be higher towards the end of the year given the US election and the likelihood of Fed rate cuts.”