By Alun John and Rae Wee
SINGAPORE/LONDON, Sept 7 (Reuters) - The yen surged to a seven-month high on Monday, as traders appeared to reassess their outlook on the long-embattled currency, driven by bets on faster Bank of Japan tightening and expectations that Japanese investors may shift funds home.
The main scheduled event of the week is Friday's U.S. inflation data, which will help shape the Federal Reserve's view on an interest-rate hike later in the month, and in turn the direction of the dollar.
The European Central Bank also meets on Thursday, when it is widely expected to raise euro zone rates.
But the focus until then is firmly on the yen. The dollar slid 1.14% against the Japanese currency on Monday to 154.42, its lowest since February, pushing past the lows struck in August after Washington and Tokyo jointly stepped into markets to prop up the yen, which was at 40-year lows at the time.
Much of the yen strength from that intervention unwound fairly quickly, but new tailwinds from capital repatriation, unwinding carry trades and U.S. political pressure are now giving short speculators cause to rethink their long-term game.
Lee Hardman, senior currency analyst at MUFG, said the break past the 155 level seemed to have reinforced traders' bullish views on the currency.
"So far this year, when we have seen the yen strengthen following bouts of intervention, that 155 level was where dollar/yen tended to bottom out. Breaking past that level is a bullish signal and we could see further upside for the yen," he said.
Recent moves have been dramatic; the dollar traded above 160 yen as recently as last Tuesday.
"We could be getting to a tipping point," Hardman said. "The market had seen it as a one-way trade, that the yen would continue to weaken. But we're starting to see the first signs that, with the Bank of Japan picking up the speed of rate hikes, that's starting to have an effect."
The euro also dropped 1% on the yen to 179.5.
CHANGE IN TIDE
The dollar's fall against the yen also knocked the currency a little more broadly. The euro rose 0.1% to $1.1621, while the pound gained a similar amount to $1.3534.
Traders are pricing a roughly 57% chance the Federal Reserve will hike rates this month in the wake of Friday's forecast-beating nonfarm payrolls report, with much now depending on this week's inflation data.
"A hot CPI print would all but seal a September hike and underpin a firmer U.S. dollar. A cooler reading would strengthen the case for a hold and leave the U.S. dollar vulnerable to a dovish Fed repricing," said Elias Haddad, global head of markets strategy at BBH.
"Even if a September Fed hike becomes a done deal, we doubt the U.S. dollar will make new cyclical highs. Tightening by other major central banks limits policy divergence."
Markets are pricing a 75% chance the Bank of Japan (BOJ) will raise rates a quarter point at its meeting on September 18, with a 60% probability of another move by December.
The Japanese currency surged more than 2% last week, following a confluence of factors including the unwinding of carry trades and expectations of capital repatriation that would boost the yen.
Eric Robertsen, global head of research and chief strategist at Standard Chartered, said that while carry trades have been among the strongest macro performers year-to-date despite a surge in borrowing costs globally, the "recent burst" of yen strength is a "potential threat to carry outperformance".
"If the JPY were to strengthen persistently, this may signal that the increase in JPY and USD rates is starting to trigger a change in asset allocation," he said.
(Additional reporting by Rae Wee in Singapore; Editing by Stephen Coates and Saad Sayeed)
