Dollar-yen poised to snuff out yen rally as traders give up on betting

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Dollar-yen poised to snuff out yen rally as traders give up on betting

The resurgent dollar is poised to snuff out the yen's rally, just as speculators gave up on betting against the Japanese currency.

The dollar went up almost 3% against the yen last week, helped by a spike in Treasury yields as traders readied for hawkish Federal Reserve commentary at their upcoming Jackson Hole symposium. The strength was broad based as the US currency surged against all Group-of-10 peers, but it put the dollar-yen back on track for a push toward the closely watched 140 level.

The renewed strength in the greenback came just as currency traders were leaning towards the view that the worst of this year's losses for the yen were behind it. The currency was battered by a widening US-Japan interest-rate gap, soaring oil prices and a weakening of its haven status, but mounted a recovery from mid-July as hedge funds covered short positions.

According to the latest data from the Commodity Futures Trading Commission, investors have slashed their net-bearish yen wagers to the minimum since March 2021.

While further strength in the dollar could reignite what had been one of the hottest macro trades of the year, yen watchers see any retreat as temporary. A push past 140 per dollar would cause pressure on the Bank of Japan over its super-easy monetary policy and the government to intervene.

Masafumi Yamamoto, chief currency strategist at Mizuho Securities in Tokyo, wrote a note Monday that the dollar-yen may approach the year-high 139.39 as markets price in a hawkish Powell speech. The pair may fall after his speech, as markets have factored in the hawkishness, as the dollar seems to be rising faster in light of US yields. The dollar-yen traded around 136.90 in Europe on Monday, down slightly on the day as investors took a break from last week's rally.

Fed Chair Jerome Powell is expected to reiterate the central bank's resolve to keep raising rates to contain inflation in his speech Friday and snuffing out speculation for a rate cut next year.

The dollar may be supported leading up to Jackson Hole on expectations for a hawkish Fed with the range for the dollar-yen seen between 134 and 139, said Shinsuke Kajita, chief strategist at Resona Holdings in Tokyo. The dollar appreciation has a risk-aversion element that could be reflected in the strength of the pair, which may lead to the pair becoming too heavy. None of the Neobanks are trying to make good on their lofty promises.