On Monday, the yen increased as a result of Bank of Japan Governor Kazuo Ueda's comments, which fueled expectations that Japan would soon usher in a new era free of negative interest rates. In contrast, the dollar declined ahead of this week's important US inflation report.
The weekend comments by Ueda suggesting the Bank of Japan could halt its negative interest rate policies when fulfillment of its 2% inflation objective is in sight contributed to the Japanese yen's roughly 1% gain, which helped the currency reach a session-high level of 146.37 a dollar in Asia trade.
In the interview with Yomiuri newspaper, Ueda said that the Bank of Japan might have access to sufficient data by the year's end to decide whether it can eliminate negative rates.
Since the US Federal Reserve started its aggressive rate-hike cycle last year while the Bank of Japan remains a dovish outlier, the Japanese yen has been under tremendous pressure against the US dollar because of the increasing difference in interest rates with the US.
According to Takehiko Masuzawa, the trading head of Phillip Securities Japan, it appears that Ueda's remarks were made in an effort to halt the yen's decline versus the dollar. His remarks are having almost the same effect as government action.
Traders have maintained high alert for any indications of assistance from Japan to support the currency ever since the yen slipped over the crucial 145 per dollar threshold in the past month. A year before, that level had led the authorities to purchase yen for the first time since 1998.
In other markets, the dollar dropped significantly, pulling down from its three-month peak last week against the pound and the euro.
Following an eight-week declining trend that stopped on Friday, the euro last traded 0.21% higher at $1.0722. At $1.2503, the pound rose 0.3%.
The US dollar index dropped 0.12% to 104.72 after ending the previous week with an eight-week winning streak, its longest streak since 2014.
On Wednesday, the US government will release its inflation report for August. Traders will be watching to see if the world's biggest economy is truly on course for a "soft landing" and if the Fed still has room to raise interest rates.
The dollar's decline was attributed by Christopher Wong, a currency analyst at OCBC, to investors "lightening up" in their prolonged dollar holdings prior to the data.
The dollar and US Treasury yields rose last week after a string of strong economic data increased speculation that the Fed may be planning additional rate hikes.
The total global economy isn't booming, but it is also not on the edge of recession. Alvin Tan, the head of the Asia FX strategy of RBC Capital Markets, described the US as appearing to be performing the best across major economies.
Turn of the tide?
The onshore Chinese yuan in Asia crept up from its sixteen-year low of 7.3510 a dollar reached on Friday to trade at 7.3188 each dollar, whereas the offshore Chinese yuan also gained over 0.4% and was last trading at 7.3313 each dollar.
According to data released during the weekend, consumer prices in China turned positive again in August as factory-gate price drops slowed. This indicates that deflationary pressures are lessening as the economy appears to be stabilizing.
The producer pricing index dropped 3.0% from one year earlier, as expected, while the consumer price index increased 0.1% from one year earlier in August.
Historically, China's inflation print negative numbers will not last for very long, although Matt Simpson, a senior market analyst of City Index, thought we might at least receive some more deflationary data besides the single one given.
The Australian and New Zealand dollars, which both gained over 0.5% against the US dollar, were among the biggest winners.
At recent exchange rates, the Kiwi increased by 0.52%, reaching $0.5914, while the Australian dollar increased by 0.6%, reaching $0.64165.