The dollar fell to about 153 yen, a seven-month low, as narrowing US-Japan rate differentials on Federal Reserve easing and Bank of Japan tightening bets drove the yen's sharpest monthly advance since 2024, reviving carry-trade unwind risk across global markets.
The yen has climbed roughly 4 percent against the dollar since the start of September, pushing the currency pair to about 153 and its weakest level for the greenback in seven months, as traders bet the Bank of Japan keeps tightening while the Federal Reserve moves toward cuts. The dollar had traded near a four-decade high of 164 yen as recently as late July.
"The yen's recent move has been driven mainly by domestic Japanese factors, while emerging-market assets and carry trades have remained resilient," said Michael Wan, senior currency analyst at MUFG. "But the risk of a broader unwind hasn't disappeared."
The policy backdrop has shifted decisively. The US policy rate stands at 3.50-3.75 percent, against roughly 1 percent in Japan, but markets now price further BOJ tightening after the central bank began normalizing policy, while the Fed is expected to ease. Washington and Tokyo jointly intervened in the currency market on July 31 to support the yen, and Japanese 10-year yields have climbed to their highest level in three decades, giving domestic investors more reason to repatriate overseas holdings.
The stakes extend well beyond the currency market. For years, investors borrowed cheaply in yen to buy higher-yielding assets worldwide, and a rapidly strengthening yen can make those trades unprofitable, forcing rapid unwinding that spills into stocks and bonds. "When investors have to sell in a hurry to cover a currency bet gone wrong, they sell whatever they hold," said Nigel Green, chief executive of deVere Group. A decisive break below 152 yen per dollar could accelerate the rally and force more traders to cover short positions, according to Adam Turnquist, chief technical strategist at LPL Financial.
The memory of August 2024 makes the move unnerving. On Aug. 5, 2024, the Nikkei 225 plunged 12.4 percent in its biggest one-day rout since the 1987 Black Monday crash, as a stronger yen and rapid carry-trade unwinding compounded fears over the US economy after a BOJ rate hike days earlier. The TOPIX fell 12 percent in a single session and the S&P 500 lost 3 percent, though markets recovered quickly once forced selling eased.
This time the transmission could hit different pockets of the market. Charu Chanana, chief investment strategist at Saxo, flagged AI semiconductor leaders such as Nvidia, Broadcom and TSMC, expensive software names including Palantir and Snowflake, leveraged small caps, and Japanese exporters such as Toyota and Sony as potential pressure points if the rally triggers broader deleveraging. Japanese institutions selling foreign bonds could also keep global long-term yields elevated, squeezing rate-sensitive REITs and utilities.
Strategists caution against reading the move as August 2024 redux. "Despite short-term fundamentals suggesting the move is overdone, it remains risky to stand in its way, particularly given the scope for further carry trade unwinding," ING strategists wrote. The durability of yen strength now hinges on how far the BOJ pushes rates and how quickly the Fed cuts, with the next BOJ policy meeting and US inflation data due in coming weeks set to test whether the rate gap keeps compressing.
This article is for informational purposes only and does not constitute investment advice.
