HONG KONG/LONDON, Sept 4 (Reuters) - The Japanese yen retreated against the U.S. dollar on Friday, pausing after a sharp rally that has put it on track for its strongest week in over a month, as traders ramp up bets on a Bank of Japan interest rate hike, while broader currency markets awaited U.S. payrolls data.
The yen strengthened to as much as 155.25 per dollar in Asia trade, just off the 155.20 high it hit last month after the July intervention, before retreating to a low of 156.38, down 0.4%.
Still, the yen is heading for a 2.2% rise 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 a lack of evidence of official action, analysts say the sudden jump in the yen largely reflects a growing expectation that the Bank of Japan could be more hawkish than previously expected when it meets on September 17 to 18.
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.
"I think the market is getting a little bit more jittery about what might be forthcoming effectively, and potentially the intervention threat is still there," said Ray Attrill, head of FX strategy at National Australia Bank.
"Unless we get some significant policy surprises, or much more aggressive intervention by the U.S. Fed on behalf of the yen, our view at the moment is that we are unlikely to see a sustained move below 155, at least not in the coming weeks," he added.
JPMorgan said expectations for Japanese pension funds repatriation and BOJ rate hikes "look somewhat overdone" at the moment, but warned that an unwinding of an estimated 16 trillion to 17 trillion yen ($102.36 billion to 108.76 billion) in yen shorts could send the dollar to a 142–146 range against the Japanese currency.
The options market suggests that traders are at their most bullish towards the yen over a three-month horizon since May 2025 — excluding the days around the last bout of intervention in late July that sent the currency soaring against the dollar.
PAYROLL DATA AWAITED
The dollar index , which tracks the U.S. currency against a basket of six others, was a touch stronger at 99.02. The euro was flat at $1.162, as was sterling at $1.3535.
The nonfarm payrolls report later on Friday is expected to show job growth picked up last month, following July's shock contraction. But Federal Reserve Chair Kevin Warsh has downplayed the recent softness in private-sector growth, while a number of his fellow rate-setters, including Governor Christopher Waller, have indicated they are less worried about inflation, even with oil prices around $95 a barrel.
With that in mind, next week's consumer price data may carry more weight for markets and the dollar than Friday's employment report, MUFG currency strategist Lee Hardman said.
"The U.S. rate market currently judges that there is close to a 50:50 probability of a Fed rate hike this month after it was pricing in closer to a 70% probability of a hike at the start of this month. The dovish repricing of Fed rate hike expectations in recent days has been encouraged by the cautious comments from the Fed’s leadership over the need for rate hikes," he said.
($1 = 156.3100 yen)
Additional reporting by Jiaxing Li in Hong Kong and Ankur Banerjee in Singapore; Editing by Kate Mayberry, Jan Harvey, Aidan Lewis
