Yen headed for strongest week in a month, dollar flat ahead of payroll data

By Jiaxing Li and Ankur Banerjee

HONG KONG, Sept 4 (Reuters) - The Japanese yen clung to its gains against the U.S. dollar on Friday and was on track for its strongest week in more than a month, as traders ramped up bets on a Bank of Japan interest rate hike and broader currency markets awaited U.S. payrolls data. 

The Japanese yen strengthened to as much as 155.25 per dollar in morning trade, just off the 155.20 high it hit last month after the July intervention. It later eased and was last flat at 155.71. 

The yen is now heading for a 2.5% gain this week, its biggest weekly gain since late July, when Japan and the U.S. conducted a rare joint intervention to halt a relentless slide in the Japanese currency.

With no clear evidence of official action, analysts say the sudden jump in the yen reflects bets the Bank of Japan could be more hawkish than previously expected when it meets on September 17 to 18. 

"This feels less like a short squeeze and more like the market cautiously reassessing a more hawkish BOJ path," said Masahiko Loo, senior fixed income strategist at State Street Investment Management in Tokyo.

"Markets are finally starting to buy into the idea that Japan may continue normalising policy into 2027."

Meanwhile, Japan's top currency diplomat Atsushi Mimura said on Friday he remained alert to exchange-rate moves and was in constant contact with U.S. authorities, keeping markets alert to the chance of another yen-buying intervention. 

PAYROLL DATA AWAITED 

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was flat at 99.01, leaving the euro flat at $1.1625 and sterling at $1.3527. 

Attention now shifts back to key data releases ahead of the FOMC meeting on September 15 to 16, including nonfarm payrolls later and CPI inflation next week. The greenback was on track for a 0.7% weekly decline.

Federal Reserve Governor Christopher Waller said on Thursday he was leaning toward keeping interest rates steady at this month's policy meeting if the next batch of inflation data showed price pressures continuing to moderate. 

Traders pared bets on a September rate hike after the relatively dovish comments from Waller, with the implied probabilities of a move this month back to 50%.

Investors were also watching geopolitical tensions in the Gulf and their implications for inflation, with Brent crude futures remaining elevated above $95.52 a barrel after U.S. strikes on Iran this week. 

The New Zealand dollar was up 0.2% at $0.5892 after the central bank lifted the cash rate by 25 basis points to 2.75% on Wednesday and signalled more tightening ahead. The Australian dollar added 0.1% at $0.7206.

In cryptocurrencies, bitcoin last shed 0.3% to $80,995.51. 

(Reporting by Jiaxing Li in Hong Kong and Ankur Banerjee in Singpore; Editing by Kate Mayberry)