SerpApi.Org
By Niket Nishant and Tom Westbrook
BENGALURU/SINGAPORE, July 22 (Reuters) - The yen recovered slightly from its weakest level in almost four decades on Wednesday, as traders weighed the possibility of intervention from Tokyo, alongside expectations for quicker rate hikes by the Bank of Japan.
Pessimism toward the currency has deepened as investors adjust to a shifting policy backdrop under Japanese Prime Minister Sanae Takaichi, whose administration has struggled to shake off perceptions that it may pressure the BOJ to delay further rate hikes. Higher rates typically support a currency.
After lingering around the previous day's 40-year low of 163.24 to the dollar, the yen got a sudden boost on Wednesday after Bloomberg News reported BOJ officials are open to raising rates at a faster pace than the consensus among economists.
The yen was last up 0.09% against a slightly weaker dollar, at 163.03.
Japan's Finance Minister Satsuki Katayama has said authorities would take decisive action if needed to curb excessive currency weakness. Tokyo had intervened in April and May, when the yen weakened beyond the 160-per-dollar level.
Those efforts, however, have done little to reverse the yen's broader trajectory, which analysts say is being driven by broad-based dollar strength and the BOJ's still-low interest rates.
"The record shows intervention buys time, not a trend reversal," Fabien Yip, market analyst at IG, said.
"Absent a genuine shift in BOJ policy, intervention looks set to keep functioning as a circuit-breaker rather than a cure."
Concerns about political influence over monetary policy intensified after the government, in a final economic blueprint, retained language urging the BOJ to align its policy with that of the government.
"For the first time in years, we didn't meet a single yen bull during our mid-year investor meetings," BofA Global strategists wrote earlier this month.
The bearishness towards the yen reflects wider unease as uncertainty over inflation, fanned by the Middle East conflict, has pushed businesses to step up protection against foreign-exchange risk.
"You're seeing a radical transformation in Japan, driven by the repricing of the Japanese yen," said Patrick Gauthier, CEO of FX payments firm Convera.
POUND EXTENDS LOSSES
The pound ticked 0.04% lower against the U.S. dollar to $1.3369, on course for its fifth consecutive day of losses should current levels hold. The British currency also fell 0.11% against the euro to trade at 85.3 pence.
Inflation in the UK cooled by more than expected in June, driven by a fall in petrol prices after a brief de-escalation in the Middle East conflict.
That lowers the odds for rate hikes by the Bank of England, said James Smith, developed markets economist, UK, at ING.
"The latest UK inflation data for June is welcome news for the Bank of England hawks, who worry that the energy crisis risks morphing into a long-lasting bout of price pressure."
Money markets show traders are fully pricing in one quarter-point increase by the BoE this year, and a roughly 60% chance of a second rate increase.
Inflation was front and centre for investors, as Brent crude futures touched a near six-week peak of $95.47 per barrel. The yield on the 30-year U.S. Treasury was at 5.14%.
Whenever the 30-year yield breaches 5%, it tends to ripple through global markets, raising the bar for riskier investments and supporting the dollar. A 20-year Treasury auction will be in focus later on Wednesday.
The dollar index, which measures the U.S. dollar against a basket of currencies, dipped 0.03% to 101.15.
"Softer U.S. inflation data has reduced the urgency for additional Federal Reserve tightening, preventing a stronger rally in the dollar," said Joel Kruger, market strategist at LMAX Group.
(Reporting by Niket Nishant in Bengaluru and Tom Westbrook in Singapore; Editing by Amanda Cooper, Mrigank Dhaniwala and Sriraj Kalluvila)
