The yen rose to its highest level in more than 1-1/2 years versus the dollar on August 12 as investors ramped up bets that the Japanese currency could gain more in the case of a prolonged China-US trade conflict.
Apart from its status as a perceived safe-haven currency which gains during periods of economic stress, the yen was also benefiting from growing expectations that the US dollar may be ending a period of extended weakness after recent comments.
"Ongoing strength in the yen is yet another signal of the shift in sentiment towards a US dollar that could start to weaken soon, especially if fears of 'intervention' become more justified," said John Marley, a senior currency consultant at FX risk management specialist, SmartCurrencyBusiness.
Fears that US officials might embark on trying to weaken the dollar have grown after Beijing weakened its currency below a psychological 7 per dollar level earlier this month, signaling an escalation in the ongoing trade war with Washington.
Against the dollar the yen climbed 0.5% to 105.15 yen, its highest level against the US currency since March 2018, barring a flash crash in January this year.
The yen also registered similar gains against the euro, rising by more than half a percentage point to its highest level in April 2017.
"Risk indicators and global markets have become more shaky and the yen is reflecting those concerns, and safe-haven shelters like the yen and the Swiss franc should continue to benefit," said Commerzbank currency strategist Esther Reichelt.
Goldman Sachs has cut its forecast for US economic growth, warning at the weekend that a trade deal is unlikely before the 2020 presidential election and that the risks of recession are increasing.
The yen is the top performer among its big rivals in global foreign exchange markets, rising 3% this month as investors have shown increased demand for Japanese government bonds after China weakened the yuan below 7 per dollar last week.
As a result, hedge funds that usually borrow in yen to finance leveraged bets in other asset classes have been forced into a rapid unwinding of short positions on the yen, sending the Japanese currency higher.
SWISS INTERVENTION
Demand for perceived safe-haven assets in the currency market surged after Friday's comments from US President Donald Trump, saying that the United States would not agree a trade deal with Beijing for now.
That has put some policymakers in a tricky spot. The Swiss National Bank, for example, was forced to intervene in currency markets to prevent the franc from appreciating sharply.
Sight deposits held at the SNB rose by 2.77 billion Swiss francs ($2.84 billion) in the week to Aug. 9, suggesting the SNB had stepped up intervention on foreign exchange markets to rein in the safe-haven currency.
Against the dollar and the euro, the Swiss franc strengthened 0.1% each.
All eyes will be on Chinese figures on July retail sales and industrial output, due on Wednesday, to gauge the impact on domestic activity from the long-running trade conflict with the United States.
Market attention will also be on the US Federal Reserve annual symposium at Jackson Hole later in the week, with investors seeking greater clarity on the future path of interest rates. Markets are expecting 60 basis points of rate cuts from the Fed by the end of the year.
The rest of the foreign exchange market, meanwhile, saw major currencies such as the euro and the dollar pinned in tight ranges.
The euro was broadly steady against the dollar at $1.1194, bound between resistance at $1.1249 and support at $1.1175.
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