The Japanese yen rose on Friday and is on track for its biggest weekly gain in four months against the dollar on rates that U.S. interest rates are nearing a peak after data showed that the world's largest economy unexpectedly contracted in the June quarter.
Futures markets predict that U.S. interest rates will peak by December of this year compared to June 2023 in early July, and the Federal Reserve will cut interest rates by 50 bps next year to support slowing growth.
The result of such a rapid decline in expectations of a rate hike was a weakening of the dollar against the yen. This week, the dollar fell by almost 2.5% against the Japanese currency, which is the largest weekly drop since the end of March.
Against the dollar, the yen rose 0.8% on Friday to 133.17 yen, hitting its highest level since mid-June.
The yen has been a major short instrument in trade with a widening interest rate differential between the United States and its global counterparts, with short rates on the yen despite the recent pullback exceeding historical averages of $5.4 billion. Dollars.
"The main impetus for the yen's rebound was the decline in US yields, reflecting a decrease in expectations of divergence in the policy of the Fed and the Bank of Japan," Mizuho strategists said in a daily note.
The gap between the yield on 10-year U.S. Treasuries and the equivalent Japanese national debt has narrowed by 70 bps since early June, as signs of slowing U.S. growth and rising interest rates pushed Treasury yields down.
On Friday, the U.S. dollar as a whole fell slightly in other countries, and the dollar index headed for the second consecutive weekly decline. It fell by 0.5% to 105.680, the lowest level since July 5.
However, risk appetite was limited as the euro struggled to hold above the $1.02 level on fears that the euro zone economy could go into recession by the end of the year.
On Friday, safe currencies, including the Swiss franc, were in demand.