The Japanese yen experienced a dramatic surge of nearly 3% on Thursday, marking its most significant daily rise since late 2022. This unexpected move, attributed by local media to official buying, aimed to support a currency that has been languishing at 38-year lows.

The U.S. dollar fell to as low as 157.40 yen following data that showed U.S. consumer inflation cooled more than expected in June. However, the scale and rapidity of the yen’s appreciation have raised suspicions among traders of potential Japanese government intervention. Authorities had previously stepped in as recently as early May to prop up the yen.

Local media outlet Asahi, citing government sources, reported that officials intervened in the currency market. Another domestic news service, Jiji, quoted top currency diplomat Masato Kanda, who did not confirm whether an intervention had occurred but noted that recent yen movements were “not in line with fundamentals.”

The Japanese Ministry of Finance, which typically refrains from commenting on foreign exchange market activities, and the New York Federal Reserve were not immediately available for comments.

Initially, currency analysts and traders speculated that the yen’s surge was likely triggered by options-related activity following the U.S. consumer price report, which supported the Federal Reserve’s case for a potential rate cut as early as September. However, as the yen continued to strengthen, others began to see signs of official buying.

“The Ministry of Finance won’t confirm this for some time, but the extent of the move strongly suggests it has been active and has taken advantage of the post-U.S. CPI data to act,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London.

Investors have been consistently selling the yen due to Japan’s lower interest rates compared to other countries. This has created a buildup of bearish positions in the Japanese currency, which some traders were forced to unwind. As a result, the dollar was last trading at 158.70 yen, down 1.8% for the day, its lowest since mid-June.

The interest rate gap between the U.S. and Japan has presented a lucrative trading opportunity, known as a carry trade, where traders borrow yen at low rates to invest in dollar-denominated assets for higher returns.

Market Reactions

Thursday’s U.S. inflation data increased the likelihood of a narrower interest rate gap. The futures market now fully expects a rate cut from the Fed in September, with approximately 60 basis points of easing by year-end, compared to around 45 basis points earlier this week. This shift has weakened the dollar.

“The market position is so extended that it can feed on itself very easily,” said James Malcolm, head of FX strategy at UBS. “Regardless of whether you think it should be stabilizing, if dollar-yen is dropping and you’re long, you have to get out… that’s the definition of a classic carry unwind.”

The yen strengthened against all major currencies, with the euro down 2% to 171.60 yen, sterling falling 1.4% to 204.72 yen, and the Australian dollar dropping to 107.50 yen.

Recent data from the U.S. regulator showed that speculators hold bets against the yen worth $14.26 billion, not far from April’s six-and-a-half-year high. The larger the bearish position, the greater the potential for investors to reverse course, boosting the yen against the dollar.

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