The yen outperformed every major currency on Thursday as global equity markets sold off and risk aversion intensified. Traders and strategists noted that domestic Japanese capital flows also provided support for the currency. The yen strengthened as much as 0.9% against the dollar to 156.69 per dollar, its strongest level since late September. It climbed as much as 1.1% versus the euro, approaching its highest level in nearly a year, and also rose about 0.5% against the Swiss franc.
Traders said long-term institutional investors bought yen as key stock indexes in Asia and Europe fell and U.S. equity futures declined. A fresh round of disappointing earnings from technology and artificial intelligence-related companies weighed on market sentiment, while escalating tensions in the Middle East pushed oil prices higher, further dampening risk appetite.
Sim Moh Siong, a currency strategist at Oversea-Chinese Banking Corp., said, "Given that AI risks are largely concentrated in the United States, concerns about AI are driving U.S. Treasury yields lower, which in turn could push the dollar lower against the yen." He also said strong Japanese government bond auctions indicated that rising yields may make JGBs more attractive to domestic investors.
Strategists pointed to strengthening demand for Japanese government bonds and signs of buying by domestic Japanese funds. Some strategists said these factors may be helping the yen outperform other G-10 currencies, though more evidence is needed to determine whether such flows are becoming a sustained source of support for the yen.
With markets constantly on alert for possible intervention by Japanese authorities to prop up the yen, any signs of stronger domestic demand for the currency could draw particular attention. Options traders have also turned slightly more positive on the yen, with the one-month dollar-yen risk reversal shifting further in favor of yen appreciation. That change suggests investors are increasingly positioning for short-term yen gains, even though strategists remain divided over whether the recent yen strength stems mainly from safe-haven demand or whether domestic Japanese capital flows are starting to provide support.
Analysts, however, cautioned against overinterpreting the move. Hirofumi Suzuki, chief currency strategist at Sumitomo Mitsui Banking Corp., said, "Considering that multiple central bank meetings are coming next week and the U.S. midterm elections follow after that, I currently do not expect this to develop into a sustained yen appreciation trend."
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