• The USD/JPY pair continued to trade near recent highs of around 161.45 during Tuesday’s Asian session.
• The US ISM manufacturing PMI index was weaker than expected, falling to 48.5 in June from 48.7 in May.
• Potential intervention by Japanese authorities in the currency market may limit the growth of this currency pair.

The USD/JPY pair is stretching higher near 161.45 during early Asian trading on Tuesday. A modest rebound in the U.S. dollar is providing some support for the pair. However, there are expectations that Japanese authorities may intervene in the currency market soon to prevent a depreciation of the Japanese yen (JPY).

U.S. manufacturing output contracted for a third straight month in June amid subdued demand and higher interest rates. The Purchasing Managers Index (PMI) for U.S. manufacturing fell to 48.5 in June from 48.7 in May, below the market consensus of 49.1. Nevertheless, hawkish comments from Fed officials continue to support the U.S. dollar despite weaker-than-expected U.S. economic data.

On Friday, San Francisco Fed President Mary Daly said monetary policy was working, but it was too early to tell when it would be appropriate to cut interest rates. Daly also said that if inflation remained sticky or declined slowly, interest rates would have to remain higher for longer.

On the other hand, Japanese Finance Minister Shunichi Suzuki said that authorities are concerned about the impact of “rapid and one-sided” currency movements on the economy, adding that excessive volatility in the currency market is undesirable and that authorities will respond to such movements accordingly. This in turn could support the JPY in the tiny term and limit the pair’s gains. OCBC analysts said: “USD/JPY continued to trade near recent highs. It is also near its highest level since 1986. There are expectations that Japanese authorities may intervene soon. While the level of the JPY is one factor to consider, officials are also focusing on the pace of depreciation as the intention of intervention is to limit excessive volatility.”