Will Japan step in as the yen hovers near a 40-year low?

The Japanese yen remained pinned near its weakest level in nearly four decades on Monday, keeping traders on high alert for possible intervention by Tokyo as a widening interest rate gap with the United States continues to weigh on the currency.

The yen traded at 162.11 per US dollar, close to the 1986 low of 162.84 touched last week. While concerns over official intervention have prevented a sharper slide, analysts believe any government action is unlikely to reverse the currency's long-term weakness.

The yen briefly rebounded last week after a sudden burst of buying sparked speculation that Japanese authorities may have stepped into the market. However, the gains proved short-lived as investors continued to favour the dollar amid expectations that US interest rates will remain significantly higher than Japan's.

Intervention fears keep traders cautious

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Market participants remain wary that Japanese authorities could intervene again if volatility accelerates. However, analysts say structural factors—including ultra-loose monetary conditions in Japan and a large interest rate differential with the United States—continue to favour dollar strength.

According to currency strategists, the possibility of intervention has acted as a brake on further depreciation but has not altered the broader direction of the yen.

Investors are also watching for signs that Japanese policymakers may abandon their traditional practice of warning markets before intervening, opting instead for surprise actions aimed at discouraging speculative bets against the currency.

Dollar steadies after weak US jobs data

The US dollar stabilized after suffering its biggest weekly decline since April following weaker-than-expected June payroll data, which reduced expectations of another near-term Federal Reserve interest rate hike.

The dollar index hovered around 100.97, while the euro traded near a two-week high at $1.1429 and sterling held around $1.3338.

Investor attention has now shifted to the minutes of the Federal Reserve's June policy meeting, due later this week, which could provide fresh insight into policymakers' outlook on inflation and interest rates. Markets will also closely watch next week's US inflation data for further clues on the future path of monetary policy.

Regional currencies in focus

Elsewhere in Asia, the South Korean won began its first day of 24-hour onshore spot trading, marking a significant reform in the country's foreign exchange market. The currency traded at around 1,531 won per dollar.

Meanwhile, the New Zealand dollar edged lower ahead of the Reserve Bank of New Zealand's policy meeting, where markets expect the central bank to deliver its first interest rate hike in more than three years.

Despite the recent pause in the dollar's rally, analysts expect the greenback to remain well supported over the medium term, leaving the yen vulnerable unless Japan's monetary policy or global interest rate dynamics undergo a meaningful shift.