Yen Strengthens as Dollar Wobbles, Oil Nears $100 and Weighs on Market Sentiment

NEW YORK, Sep 9: The Japanese yen held near its strongest level since February on Wednesday, keeping the US dollar under pressure as investors assessed the impact of surging oil prices and an expanding conflict in the Middle East.

The yen’s strength comes as crude prices approach the psychologically important $100-a-barrel mark, adding to concerns about inflation and economic growth. Brent crude futures climbed more than 1.48 per cent to $99.37 a barrel amid a fresh escalation in regional hostilities.

Iran-backed Houthi forces in Yemen launched attacks on several Saudi cities, drawing another US ally into the conflict that has continued for more than six months. At the same time, US forces struck several Iranian oil tankers, while Iran targeted a US military base in Jordan.

The latest developments have increased uncertainty across financial markets ahead of a US inflation report due on Friday. The data is expected to influence expectations for upcoming monetary policy decisions by the Federal Reserve and Bank of Japan.

The dollar weakened modestly against major currencies, although analysts said part of the decline reflected the yen’s rapid appreciation over the past week.

The euro was little changed at $1.1631, while sterling traded at $1.3546. The dollar index, which tracks the greenback against six major currencies, stood at 98.15, close to its lowest level in nearly two weeks.

OCBC strategists said rising energy prices could have significant implications for Federal Reserve policy, particularly after stronger-than-expected US employment data last week revived expectations of another interest-rate increase.

They said higher oil prices and bond yields could limit the dollar’s decline, but a more significant move would likely depend on Friday’s inflation figures.

Yen rally puts carry trades under pressure

The yen has emerged as the main focus of currency markets after gaining around 4 per cent in September. Its sharp advance has altered the outlook for the popular carry trade, in which investors borrow in low yielding yen to invest in currencies and assets offering higher returns.

The Japanese currency was trading at 153.65 against the US dollar, remaining close to Tuesday’s seven month high of 152.89. Its gains have extended beyond the dollar, with the yen also strengthening against the euro, sterling and other popular carry trade currencies, including the Mexican peso and Turkish lira.

Expectations of faster monetary tightening by the Bank of Japan, the possibility of Japanese investors bringing overseas funds home and pressure from Washington for a stronger yen have all contributed to the currency’s advance.

Markets are widely expecting the BOJ to raise its policy rate by 25 basis points at its September 17-18 meeting. However, the yen’s next move could depend heavily on whether Governor Kazuo Ueda signals further tightening and on the Federal Reserve’s own interest-rate path.

Aninda Mitra, head of Asia macro and investment strategy at BNY Investments, said the outlook would depend substantially on how markets price the Fed’s future rate decisions.

Mitra estimated that the yen’s fair value was in the 140s, suggesting that further appreciation toward that level would not be unexpected after the currency’s prolonged period of weakness.

Elsewhere, the Australian dollar rose 0.12 per cent to $0.7225, remaining just below the four-month peak reached in the previous session. The New Zealand dollar also advanced 0.16 per cent to $0.5862.

With oil prices approaching $100 and geopolitical risks intensifying, investors are now watching Friday’s US inflation data closely for clues about the direction of interest rates and the broader outlook for global financial markets.