A dramatic rebound in the yen has sent shockwaves across global markets and left the currency on course for its best month this year, setting the scene for further volatility around Japanese and US central bank meetings this week.
The yen has leapt 4.7 per cent against the dollar in July, helped by the possibility that the Bank of Japan could raise interest rates on Wednesday, narrowing the yawning gap with Federal Reserve borrowing costs that had driven the currency to a string of multi-decade lows. Expectations of Fed cuts have also ramped up following a fall in US inflation earlier this month.
The currency’s recovery has been turbocharged by the unwind of popular “carry trades”, where investors borrowed in yen to fund the purchase of higher yielding currencies and had pushed bets against the yen to their most extreme levels for around two decades.