Yen dips for 2nd day ahead of US inflation data

The yen declined for a second consecutive day on Tuesday amid calmer trading conditions ahead of US inflation data, while the pound gained ground following a surprise drop in the British unemployment rate in June.

Currency markets have been volatile due to a recent surge in the yen, leading to a sell-off in the carry trade and a decline in stocks.

However, the dollar strengthened by 0.1 per cent against the yen on Tuesday to 147.34 yen, marking a second consecutive increase, suggesting that the market may have passed the worst of the recent instability.

According to Kamal Sharma, a senior G10 FX strategist at Bank of America, there is optimism that the carry trade still has potential, and concerns about a US recession may be exaggerated.

The yen reached 38-year lows in July as investors engaged in the carry trade, borrowing yen in Japan at low interest rates to sell for other currencies and invest in higher yielding assets.

Factors such as a surprise rate hike by the Bank of Japan and anticipated US rate cuts due to a weakening labour market have led to a reversal of the carry trade trend, resulting in the yen strengthening by approximately eight per cent since mid-July.

Investors were anticipating the US producer price index (PPI) inflation data on Tuesday, with the more significant consumer price inflation numbers scheduled for Wednesday. These figures will influence Federal Reserve interest rate decisions.

The dollar index remained stable at 103.13, while the euro held steady at $1.0929. Analysts suggest that market focus may shift from consumer inflation data, which is expected to show a modest 0.2 per cent increase in July prices, to concerns about the labour market driving market sentiment.

Attribution: Reuters
Subediting: M. S. Salama