The yen fell to its lowest level since 1986 against the US dollar on Wednesday, leaving currency markets on alert for any sign of intervention from Japanese authorities to boost the battered currency.
The US dollar traded at 160.39 yen, a level last seen in December 1986, as a widening interest rate gap between the two countries continued to weigh on the Japanese currency.
Analysts said traders were testing the tenacity of the Finance Ministry and Japan's central bank, which spent $62 billion in late April and early May to support the currency when it fell past the 160 level.
It should be noted that the 'carry trade' trading strategy, where investors borrow in a low interest currency to invest in a high interest currency, has become very popular as some countries have raised borrowing costs in recent years.
While Japan has raised interest rates this year to a range of 0 to 0.1%, US rates of 5.25% to 5.5% have attracted investors to higher returns on dollar assets, boosting the US currency against the yen.
Top currency diplomat Masato Kanda said on Monday that Japan was always ready to take action against excessive market movements, even as traders continued to ignore the warning after the latest intervention did little to stem the sell-off.
The US dollar index, which measures the US dollar against six major currencies, strengthened 0.3% to 105.99, its highest level since May 1.
The US personal consumption expenditure (PCE) inflation report on Friday will be key for currency markets. The lower-than-expected number could cause traders to increase their bets on a Fed rate cut this year, providing some relief to the yen.
The euro slipped 0.3% to $1.0683 after a European Central Bank policymaker spoke of the possibility of further rate cuts this year. It's a different attitude from the Fed's Michelle Bowman.
ECB governing council member Olli Rehn told Bloomberg that two more rate hikes this year look "reasonable". This contrasts with Fed Governor Bowman, who has said he does not expect any US rate cuts this year.
