Yen stands tall as dollar wobbles, oil's run towards $100 chills sentiment

By Ankur Banerjee

SINGAPORE, Sept 9 (Reuters) - The Japanese yen steadied near its strongest level since February on Wednesday, keeping the dollar on the defensive as traders grappled with oil prices pushing towards $100 per barrel in the face of a widening war in the Middle East.

Iranian-backed Houthis in Yemen launched strikes on several Saudi cities, further embroiling a U.S. ally in the over six-month-long conflict, while U.S. forces hit multiple Iranian oil tankers and Iran targeted a U.S. base in Jordan.

That pushed Brent crude futures up over 1.48% to $99.37 per barrel, casting a shadow over global markets ahead of a U.S. inflation report on Friday that will set the stage for central bank meetings next week in the U.S. and Japan.

The reaction in the currency market was to push the dollar modestly lower, although some analysts attributed that weakness to the rapid rise of the yen in the past week.

The euro was steady at $1.1631, while sterling last bought $1.3546. The dollar index, which measures the U.S. currency against six of its key rivals, was at 98.15, close to its lowest level in almost two weeks.

OCBC strategists said the latest escalation keeps Fed policy implications from higher energy prices in focus, particularly after last week’s strong U.S. payrolls report revived expectations of another rate hike.

"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 spotlight has been on the yen on the back of its 4% rise in September that has shifted the calculus for the popular carry trade in which investors borrow in yen at a low cost to invest in other currencies and assets offering higher yield.

The yen was firmer at 153.65 per U.S. dollar, close to the seven-month high of 152.89 it hit on Tuesday. The rally has been broad-based, with the Japanese currency gaining against the euro and sterling, as well as popular carry-trade targets such as the Mexican peso and Turkish lira.

The move has been fuelled by expectations of faster Bank of Japan tightening, 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 to 18 meeting, but the rally will hinge on whether Governor Kazuo Ueda follows through with hawkish comments while the wild card will be the Federal Reserve.

"Much depends on the market’s pricing of the Fed’s trajectory of interest rates as well," said Aninda Mitra, head of Asia macro and investment strategy at BNY Investments.

"'Fair value' for the yen is in the 140s in our estimation and a further move toward that area should not entirely come as a surprise after, what has clearly been, an overshoot to the side of excessive yen weakness."

Across the Pacific, the Australian dollar rose 0.12% to $0.7225, just shy of the four-month high it touched in the previous session. The New Zealand dollar was 0.16% higher at $0.5862.

(Reporting by Ankur Banerjee in SingaporeEditing by Shri Navaratnam)