By Alden Bentley
NEW YORK/LONDON/SINGAPORE (Reuters) – The dollar fell to a more than two-month low against the yen on Wednesday as short-term carry trades on the yen were unwound ahead of a meeting next week by the Bank of Japan, with investors expecting a tightening of monetary policy by hawkish officials.
The yen also rose to its highest level against the euro since mid-May on expectations that yield differentials that have made it high-priced for foreign investors to hold yen-denominated securities would narrow.
The index, which measures the greenback’s value against a basket of six currencies including the yen and the euro, fell 0.12% to 104.35. Losses were pared after S&P Global said the preliminary U.S. Composite PMI Output Index, tracking the manufacturing and services sectors, rose to 55.0 this month, its highest level since April 2022.
“We are watching concerns about global growth and will be watching for the rest of the week to see if that continues and if the U.S. does something different,” said Helen Given, deputy director of trading at Monex USA in Washington, noting that surprise rate cuts in China this week were a catalyst for those concerns.
“The US PMI figures were quite positive this morning, but not above average,” she added.
The week’s biggest macroeconomic news will come on Thursday with the first estimate of second-quarter U.S. GDP and on Friday with the consumer price index, on which the Federal Reserve bases its inflation measure.
Reuters sources said earlier in the day that Japan’s central bank was likely to discuss raising interest rates at its July 30-31 meeting and outline a plan to halve its bond purchases in coming years.
The Fed is meeting on the same days. While few expect it to start cutting rates this month, there is a good chance the Fed’s messages about a change in direction in September will become stronger, given months of falling inflation and slower growth.
More than three-quarters of economists polled by Reuters expect the BOJ to leave its decisions unchanged this month, with further moves likely in September or October.
Recent rounds of suspected currency interventions have seen speculators rush to close out profitable carry trades, in which they borrowed money in low-interest yen and invested in higher-yielding currency assets.
The yen is the best-performing G-10 currency against the dollar so far in July.
The dollar fell 1.07% to 153.92 yen, its lowest since May 6. The euro hit its lowest price since May 8, falling 1.16% to 166.915 yen.
“Even if the BOJ comes out with something that’s not as hawkish as markets are expecting, there’s a risk that the Treasury could step in and prevent the yen from weakening if it does,” said Brian Daingerfield, a currency strategist at NatWest Markets in Stamford, Connecticut.
“Of course, there is the reality that the Fed appears to be close to embarking on its own easing cycle.”
The euro fell 0.11% to $1.0839. Sterling was unchanged at $1.2905 at the end of the session.
Commodity-linked currencies have fallen to multi-week lows. Oil prices are at a month-and-a-half low, and industrial metals like iron ore have hit 3-1/2-month lows on a bleak demand outlook from China.
The Australian dollar fell 0.5% to end June at $0.6584, close to its low in early June.
The Canadian dollar weakened to 1.3808 per U.S. dollar.
The New Zealand dollar fell to $0.5927, a level last seen in early May.
“We’re seeing weaker demand in China and Asia overall, and that’s just coming down,” said Jason Wong, senior market strategist at BNZ in Wellington.
In cryptocurrencies, bitcoin gained 0.69% to $66,290.00. It fell 2.38% to $3,399.80.
