The Japanese Yen strengthened against the US Dollar on Monday as traders reduced expectations for another Federal Reserve rate increase. USD/JPY fell for a second session and traded near 159.10 during Asian hours.
Japan’s weaker second-quarter growth figures failed to reverse the currency’s advance. Softer US retail sales and inflation data placed greater pressure on the dollar.
Japan’s economy expanded 0.3% during the second quarter, slowing from 0.5% in the previous three months. Economists had expected another 0.5% quarterly increase.
Annualized growth reached 1.1%, below the 2.0% forecast and the first quarter’s 1.8% rate. The figures may complicate the Bank of Japan’s rate plans.
The central bank has used firm domestic demand to support gradual policy normalization. Slower growth may encourage officials to assess incoming inflation and spending data carefully.
Still, Japan’s 10-year government bond yield climbed to its highest level in three decades. Market pricing placed the chance of a September BoJ increase near 80%.
Capital Economics described the report as “a mixed bag.” Its analysts said government consumption increased, partly reflecting the administration’s wider fiscal spending program.
Government spending rose during the quarter, while authorities continued limiting the transfer of higher energy costs to households. Analysts linked the consumption increase to Prime Minister Sanae Takaichi’s expansionary fiscal policy.
The Japanese yen also gained as weaker US figures reduced demand for the dollar. US retail sales dropped 0.6% in July after rising 0.2% in June. Economists had forecast a 0.1% monthly increase. Annual sales growth slowed to 5.0% from 6.8% during the previous month.
Recent employment and inflation reports also pointed to softer economic conditions. July payrolls declined, while consumer and producer inflation readings eased market concerns about further tightening.
Fed funds futures indicated a 69.9% chance that policymakers would keep rates unchanged at their September meeting. This probability stood at 47.6% one month earlier. BNY analysts said “softer US data over recent weeks has reduced rate hike expectations.” They added that markets priced less than one full increase by December.
The US Dollar Index slipped 0.1% to 99.501, near its lowest level this month. Meanwhile, the euro, pound, Australian dollar, and New Zealand dollar strengthened. The weaker dollar supported other major currencies during Monday’s session.
The euro reached $1.1585, while sterling traded at $1.3551. Australia’s dollar rose to $0.7101, and New Zealand’s currency advanced to $0.5911.
USD/JPY traded near 159.075, leaving the Japanese Yen about 0.2% stronger against the dollar. The pair stayed within its range from the previous week.
OCBC analysts Sim Moh Siong and Christopher Wong expect intervention concerns to limit further gains in USD/JPY near 160. Japanese officials have monitored the yen’s weakness closely.
The analysts said “intervention risks should help cap USD/JPY near 160.” Still, they questioned whether Japan’s government would support more rate increases after September or October.
Scotiabank strategists said the yen’s recent modest recovery likely reassured Ministry of Finance officials. A firmer currency reduces immediate pressure for direct action in foreign exchange markets.
Still, OCBC said a lasting Japanese Yen recovery may require a clearer BoJ commitment to faster rate normalization. A September increase would mark its third hike in nine months.
This pace would represent Japan’s fastest tightening cycle since the country’s asset bubble collapsed in 1989. Traders now await further BoJ guidance and the Federal Reserve’s Jackson Hole symposium.
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