On Friday, the yen declined amid investor nervousness following its sharp increase the day before, driven by an unforeseen decrease in U.S. consumer prices and speculation about Tokyo's involvement in the currency market.
The Japanese currency, hovering near 38-year lows, fluctuated between gains and losses at the start of volatile Asian session trading before easing slightly.
On Thursday, the yen surged by almost 3% to 157.40 following the U.S. consumer inflation report, which showed a drop in prices and raised expectations that the Federal Reserve might cut rates as early as September.
Tokyo's top currency diplomat, Masato Kanda, stated on Friday that authorities would take necessary measures in the currency market but declined to comment on whether they had intervened.
Interventions in the currency market are rare in a floating exchange rate environment, but authorities need to respond appropriately to excessive volatility or erratic movements, according to Kanda.
The lack of official comments on the possible intervention shifted investor attention to the data, which was set to be published later on Friday and might shed light on the authorities' actions.
The Asahi news outlet, citing government sources, reported that officials had indeed intervened in the foreign exchange market. Meanwhile, the Nikkei, citing its own sources, reported that the Bank of Japan conducted a review of euro-to-yen bank rates on Friday, which heightened market anxiety.
President Joe Biden's poor performance at the recent televised debate has increased the chances of Donald Trump's return to the White House after the November presidential election.
Tokyo intervened in the market in late April and early May, spending about 9.8 trillion yen ($61.55 billion) to support the currency. A report from the Ministry of Finance at the end of the month is expected to confirm the amount spent on any intervention.
That being said, the yen has since fallen below these levels, hitting a 38-year low of 161.96 per dollar last week. This decline is due to a significant interest rate differential between the US and Japan this year, causing the yen to fall by more than 11% in relation to the dollar.
This gap has created a highly profitable trading opportunity for traders who borrow yen at low interest rates to invest in dollar-denominated assets for higher returns, known as a carry trade.
The yen strengthened following Thursday's data revealing that US consumer prices fell in June for the first time in four years, indicating a return to deflation and increasing the potential for a Fed interest rate cut.
According to the CME FedWatch tool, traders now estimate a 93% chance of a Fed rate cut in September, up from 73% prior to the consumer price index release. Markets are anticipating a policy easing of 61 basis points this year.
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