Yen surges as traders brace for interest rate shift while risk mood sours

Yen rallies to six-week high as traders ditch bets against currency amid global stock plunge and Fed rate cut bets.

The yen rallied for a fourth day running on July 26, reaching a a six-week high, as traders ditched their long-running bets against the currency and a plunge in global stocks drove investors towards traditionally safe assets.

The U.S. dollar slipped against other currencies as traders raised their bets on Federal Reserve rate cuts this year. It was last down 0.95% at 152.41 yen after slumping to 151.95 earlier in the London session, its lowest since early May.

"This is a case of so many people all trying to find the door all at the same time," said Jane Foley, head of FX strategy at lender Rabobank. "It seemed like everybody and his dog was shorting the yen, it was the funding currency for the carry trade."

Investors had been heavily shorting - or betting against - the yen, seeing little chance of the yawning interest rate gap between Japan and the U.S. closing meaningfully. That gap has made U.S bonds and the dollar look attractive and pushed the yen to a 38-year low earlier this month, prompting intervention from authorities.

Those assumptions have suddenly been questioned this week. Sources told Reuters that the central bank is likely to debate whether to raise interest rates next week, while traders increasingly expect Fed cuts.

The yen was also supported on Thursday by its traditional role as a safe-haven currency, as a tech-led sell-off in global stocks continued.

Investors have been rapidly backing out of so-called carry trades, in which they had been borrowing low-yielding currencies to buy higher yielders like the dollar. As investors undo those trades they have been buying back the yen, catapulting it higher.