(Bloomberg) — A wild week in the currency markets has left hedge funds heading for the exits on their dollar trades and turning their attention toward the Japanese yen.
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Interest in the yen surged Wednesday, making it the most-traded currency versus the dollar, according to data from the Depository Trust & Clearing Corp. Option trading volume on the yen was nearly double that of its previous high this year, as the currency rallied versus all its major peers after better-than-expected Japanese wage data bolstered the case for the Bank of Japan to keep raising interest rates.
“Over the course of this week, we’ve been recommending mid-tenor USD/JPY downside trades targeting 147-150 region and have received significant interest from our global franchise on these ideas,” said Sagar Sambrani, a senior foreign-exchange options trader at Nomura International Plc in London. Dollar-yen closed Wednesday at 152.61 after falling as low as 152.12.
The BOJ raised rates last month and swap markets are already pricing in an about 75% probability of another increase as soon as July. The summary of opinions for the central bank’s January meeting said it is likely to continue monitoring the yen’s value, and may raise rates again to avoid excessive depreciation and its effects on inflation.
The yen received a further boost Thursday after BOJ board member Naoki Tamura said the central bank should lift its benchmark rate to about 1% by the latter part of the fiscal year ending in March 2026.
“While the Fed may not decrease rates as much as hoped a couple months ago, any positive change on Japan’s side will help decrease that gap in yields and help boost the yen,” said Helen Given, a foreign-exchange trader at Monex.
The growing allure of the yen is happening as market participants in long dollar trades thin fast. Bloomberg’s gauge of the greenback fell for a second day Wednesday, as investors continued to unwind trades on the currency, according to traders.
“There has certainly been a big reduction in dollar longs and it is a very similar pattern to the events of Jan. 20,” said Antony Foster, London-based head of Group-of-10 spot trading at Nomura International. “People had re-established their longs after the inaugural wash-out, but the delay in implementing the tariffs has forced many of these dollar longs out of the door.”