The Japanese yen fell for a second day on Tuesday as trading conditions stabilized ahead of the release of US inflation data. Meanwhile, the British pound gained strength after data showed a surprise decline in the UK unemployment rate for June.
Currency markets have recently experienced significant volatility, driven primarily by a sharp rally in the yen since July. This move was linked to a popular investment strategy known as the “carry trade,” in which investors borrow yen at low interest rates in Japan to invest in higher-yielding assets elsewhere. This strategy has contributed to a plunge in stock markets.
The dollar rose 0.33 percent against the yen to 147.71, marking the second straight day of gains for the U.S. currency. The recent rise in the dollar against the yen suggests that markets are recovering from recent turmoil.
Kamal Sharma, G10 FX strategist at Bank of America, said: “The general feeling is that there is still life in this carry trade. Perhaps recent moves, against the backdrop of deteriorating US economic data, have been excessive and fears of a US recession may be overblown.”
The yen had previously fallen to its lowest level in 38 years in July as investors engaged in intense carry trades. Several factors, including an unexpected rate hike by the Bank of Japan and expectations of rate cuts in the US due to the slowing labour market, have contributed to reversing the trend of carry trades. This change has resulted in an appreciation of the yen by around 8% since mid-July.
Government sources said the Japanese parliament plans to hold a special session on August 23 to discuss the central bank’s recent decision to raise interest rates.
On Tuesday, investors were awaiting the release of US producer price index (PPI) inflation data, due later in the day, followed by more closely watched consumer price inflation data on Wednesday. These figures will provide insight into the Federal Reserve’s future interest rate policy.
The dollar index rose 0.13 percent to 103.21 as investors awaited inflation data, while the euro dipped 0.1 percent to $1.0922. Sharma suggested that investors may not be too focused on U.S. inflation data, which is expected to show a modest 0.2 percent rise in prices for July, as concerns about the labor market appear to be having more influence on market sentiment.
Pound strengthens on positive employment data
Sterling rose 0.27 percent to $1.28 after data showed the UK unemployment rate fell to 4.2 percent in June from 4.4 percent in May, defying economists’ predictions of a slight rise. Job vacancies have declined and wage growth has slowed.
Low response rates to recent surveys have left investors and economists viewing British labour market data with some scepticism. “The overall message from today’s report is that the labour market is still cooling, with falling vacancies being the main symptom of this,” said Francesco Pesole, currency strategist at ING. “But there are probably enough factors for the Bank of England to be generally cautious about rate cuts.”
In other currency moves, the Australian dollar rose 0.27% to $0.6603. The US dollar also rose 0.21% against the Swiss franc, another currency that has seen gains recently as investors unwind carry trades.
(With contributions from Reuters)
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