By Ankur Banerjee
SINGAPORE, Sept 21 (Reuters) – The Japanese yen steadied on Monday following a sharp drop last week that stirred intervention jitters, while investors pondered the global interest-rate outlook after a wave of hikes and hawkish signals from major central banks this month.
The yen was at 156.85 per US dollar after declining 2% last week. Japanese markets were closed for a three-day holiday, leading to low liquidity while keeping traders on alert for an official intervention.
The Bank of Japan raised rates on Friday to their highest level in 31 years to 1.25%, yet the widely expected move did not boost the yen as two dissenting votes and a lack of explicitly hawkish guidance disappointed investors.
That drove yen sharply down before the Nikkei newspaper reported that Japanese officials conducted rate checks, often seen as a precursor to currency intervention.
Apart from the BOJ, the Federal Reserve and the European Central Bank raised rates this month, with both warning further tightening might be needed to tackle inflation due to the almost seven-month-long war in the Middle East.
Fred Neumann, chief Asia economist at HSBC, said the BOJ’s messaging has become all the harder because the Fed delivered a hawkish signal with its unanimous decision to raise its policy rate.
“The bar thus remains high for the BOJ to convince markets of its hawkish tilt and anchor expectations when it comes to the yen,” he said. “In the coming weeks and months, investors may again test the resolve of the BOJ to push rates higher and match the Fed’s tightening.”
BULLISH YEN BETS TESTED
The yen had firmed to its strongest level in seven months in early September as traders wagered on a faster pace of BOJ hikes and early signs of repatriation by Japanese investors but the currency has since surrendered some of those gains.
Positioning data showed investors had grown more bullish on the yen heading into the BOJ meeting. Speculators increased net long-yen positions in the week to September 15, weekly US regulatory data showed, with their net-long exposure swelling to $9.7 billion, the largest since July 2025.
Thomas Mathews, head of markets for Asia-Pacific at Capital Economics, said despite the BOJ’s hike it’s clear the market sees the Fed as the more hawkish of the two, at least relative to where expectations were at the start of the month.
“That said, given the yen is still quite a bit stronger than it was, it might take a bit more of a slide before intervention is back on the table,” Mathews said.
The yen slid to a four-decade low of 163.99 per dollar in July before a rare coordinated intervention by Tokyo and Washington helped lift the currency.
FED RATE OUTLOOK IN FOCUS
The dollar index, which tracks the US currency against six major peers, was steady at 100.23 after gaining more than 1% last week following the Fed’s rate hike, as the central bank signalled more increases could be coming.
Traders are currently pricing in a 55% chance of a rate hike at the Fed’s next meeting in October, up from 42.5% a week earlier, the CME FedWatch tool showed.
“We do not think that the midterm elections are going to be a limiting factor in the Fed delivering another hike in October,” said Thomas Simons, chief US economist at Jefferies.
“Whether there is another hike in December will come down to the data and geopolitical developments. Looking to 2027, the path of rates will come down to what happens with the labor market. We would say rate cuts are likely in second half of 2027.”
The euro was little changed at $1.1482 after voting projections showed the far-right Alternative for Germany (AfD) took first place in state elections in northeastern Germany, in a blow to Chancellor Friedrich Merz’s conservative party.
In other currencies, sterling last bought $1.339 in early trading. The Australian dollar fetched $0.7129, while the New Zealand dollar was at $0.5721.
(Reporting by Ankur Banerjee in Singapore; Editing by Sonali Paul)
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