The Zhitong Finance App noticed that signs of easing inflationary pressure in the US have boosted the market's bets that the Federal Reserve will relax monetary policy this year. As a result, the US dollar generally weakened against other currencies, and the yen became one of the major currencies that rose the most. The yen rose 0.8% against the US dollar on Thursday, although data showed that Japan's economy contracted more than expected in the first quarter.

“The recent rebound in yen mitigates the need for authorities to intervene,” said Koji Fukaya, a researcher at Tokyo Market Risk Consulting. He said that although Japanese officials are concerned that the weakening yen will dampen consumer confidence and increase inflation, “the biggest driving force behind the yen's rebound is the possibility that the US, and the Federal Reserve in particular, may cut interest rates.”

The yen fluctuated sharply in recent weeks, falling below 160 yen per dollar at the end of April, for the first time since 1990. Since then, the Japanese authorities are suspected to have carried out two rounds of intervention, which spurred a temporary rise in the yen. The rebound in yen shows that although Japanese officials warned that intervention measures would be taken, and Bank of Japan officials hinted that interest rates may be raised further this year, in the end, US data and policies were the main factors driving the yen's rebound.

As of press time, the exchange rate of the yen against the US dollar was 153.99, up 0.6%. This means it is about 2% higher than the level of $157.52 reached before the yen strengthened sharply on May 1. This surge has sparked speculation that Japan may have intervened to support the yen.

The large gap between US and Japanese benchmark bond yields dragged down the yen, and US Treasury yields plummeted after the inflation data was released, helping to close this gap. The yen is strengthening as US Treasury yields fall, similar to the trend at the end of 2022.

On Thursday, the yield on US 10-year Treasury bonds was about 3.4 percentage points higher than the yield on Japanese 10-year Treasury bonds. The data shows that this is almost the smallest gap in two months.

Strategist Sebastian Boyd said, “My model still shows that US Treasury bonds and yen are cheap, which means that while the yen appreciates, US Treasury yields may fall further. However, the immediate risk is that after rising 27 basis points so far this month, two-year treasury yields will retract part of their trend, which will also cause the yen to take back some of its recent gains. In the absence of drivers, the yen's default setting appears to be weakening.”

Hirofumi Suzuki, chief foreign exchange strategist at Sumitomo Mitsui Bank, said: “Until recently, the main trend of the yen was a gradual decline, but due to weak US economic indicators and CPI, the possibility that the Federal Reserve will cut interest rates this year is showing. It's getting easier for the yen to strengthen.”

Overnight index swaps still show that the possibility that the Bank of Japan will raise the benchmark interest rate by July is about 63%, but this possibility is down from 70% on Wednesday. Investors will pay close attention to whether the Bank of Japan will reduce the size of debt purchases again on Friday after reducing the scale of debt purchases on Monday.

Japan's Finance Minister Shun Suzuki said on Tuesday that “close policy coordination” is needed between the government and the Bank of Japan, adding that he is closely monitoring the trend of the yen. This highlights the concerns of Japanese policymakers that an excessively weak yen could damage the economy.