Japanese yen rallies; dollar rattled by oil topping $100

By Amanda Cooper

LONDON, Sept 9 (Reuters) - The Japanese yen traded at seven-month highs on Wednesday, keeping the dollar under pressure, as traders grappled with oil prices breaking above $100 per barrel in the face of a widening war in the Middle East. 

Iranian-backed Houthis in Yemen launched strikes on several Saudi Arabian cities, further embroiling a U.S. ally in the conflict, while American forces hit multiple Iranian oil tankers and Tehran struck a U.S. base in Jordan.

Brent crude futures rose nearly 3% to top $100 for the first time since late July, hampering global markets ahead of U.S. inflation data on Friday that will set the stage for central bank meetings next week in the U.S. and Japan.

The dollar fell modestly, although some analysts attributed that weakness to the yen's rapid rise over the past week and investors positioning ahead of upcoming central bank meetings. 

The euro rose 0.18% to $1.1641, nearing a two-week high, ahead of a widely expected rate rise from the European Central Bank on Thursday.    

OCBC strategists said the latest Middle East escalation kept Federal Reserve policy implications from higher energy prices in focus, particularly after last week’s strong U.S. payrolls report revived expectations of a rate hike next week. 

"For now, higher oil and yields may help limit USD downside, but we suspect a more decisive move will require confirmation from the upcoming inflation data," they said in a note. 

The dollar index, which tracks the U.S. currency against six others, neared its lowest in almost two weeks.  

YEN ON THE MARCH AHEAD OF BOJ MEETING

The spotlight has been on the yen due to its 4% rise so far this month, shifting the calculus for the popular carry trade, in which investors borrow in yen at a low cost to invest in other currencies and assets that offer better returns.

The yen rallied, leaving the dollar down 0.4% on the day at 153.38 yen, just shy of Tuesday's seven-month high of 152.89. The Japanese currency has strengthened across the board, including against the likes of the euro and the pound, as well as against popular carry-trade targets such as the Mexican peso and Turkish lira.

The move has been fuelled by expectations for faster Bank of Japan tightening, the prospects of Japanese investors repatriating overseas funds and pressure from Washington  for a stronger yen.

Traders widely expect the BOJ to raise rates by 25 basis points at its September 17 and 18 meeting, but the rally will hinge on whether Governor Kazuo Ueda follows through with hawkish comments.

Treasury Secretary Scott Bessent on Tuesday dared traders to bet against the yen, following historic joint U.S./Japanese intervention to boost the currency in late July to deter Tokyo from selling U.S. Treasuries to fund the operation. 

"I am the house now, so when we intervene with the Japanese yen, I have pretty good insight into what the Japanese, what the Bank of Japan is going to do, what Japanese policymakers are going to do. And you can bet against me if you want," he told an event at the SMU Cox School of Business.

"While Bessent’s comments may sound bizarre, it is true. The U.S. will do what it takes to protect its Treasury market and prop up the yen," XTB research director Kathleen Brooks said.

The other wildcard is the Fed, for which the chances of a rate rise next week now stand at 60%.

The Canadian dollar, meanwhile, shrugged off another sideswipe from the United States in the escalating trade conflict between the two neighbouring countries. On Tuesday, the U.S. government banned imports of a broad range of Canadian items, including alcoholic beverages, motorcycles and dairy products.

The loonie held steady on the day at C$1.377 to the dollar, not far from three-week highs.

China's yuan traded near 3-1/2-year highs against the dollar as better-than-expected inflation data and quicker export growth buoyed the currency.[CNY/]

(Additional reporting by Ankur Banerjee in Singapore; Editing by Shri Navaratnam, Thomas Derpinghaus, Alex Richardson and Chizu Nomiyama )