By Jiaxing Li
HONG KONG, Aug 5 (Reuters) - Currency markets paused for breath on Wednesday as pressure on the Japanese yen eased following recent bouts of intervention and a forceful show of U.S. support, while the dollar held near six-week lows on fresh optimism over the Middle East.
The yen was slightly firmer at 157.61 per U.S. dollar, after easing about 0.4% in the previous session from Monday's high of 155.20. It remained well above recent 40-year lows of around 164 per dollar.
The U.S. will do
"whatever it takes" to support Japan's efforts to stabilise the yen, Treasury Secretary Scott Bessent said on Tuesday, offering fresh verbal support after joint intervention by Washington and Tokyo to buy the Japanese yen hit bearish traders last week.
Muted market moves suggest investors "remain sceptical about how long the effects of the recent interventions will last," according to Vincent Chung, co-portfolio manager for diversified income bond strategy at T. Rowe Price.
"The market's base case appears to be that intervention may slow the pace of further yen depreciation, rather than lead to a lasting reversal," he said.
Bessent also told public broadcaster NHK that he was sure Bank of Japan Governor Kazuo Ueda will "do what is best" for the country's economy, heightening market expectations that the BOJ could raise rates at its next policy meeting on September 17 and 18.
"A normalisation in BOJ policy is needed" to turn the tide for the Japanese currency, said Mark Dowding, chief investment officer for RBC BlueBay's fixed income team.
He added that the yen may settle in a 155-160 range for the time being, with attention likely to shift next to the Federal Reserve and BOJ policy meetings later in September.
OIL RETREAT DENTS DOLLAR
The U.S. dollar index, which tracks the currency against six major peers, was little changed at 99.85, struggling to find direction after hitting a six-week low on Monday.
The euro was steady at $1.1533 and sterling traded flat at $1.3453.
The kiwi dollar was roughly down 0.4% at $0.5870 after New Zealand's unemployment rate climbed to a decade-high of 5.6% in the second quarter. The Aussie was flat at $0.7046.
Oil prices extended their falls, with Brent crude futures last down 0.5% to a three-week low, as signs of a possible diplomatic off-ramp to the Iran conflict eased fears of supply disruptions and prompted traders to unwind risk premiums.
U.S. President Donald Trump said his administration had "very good discussions" with Iran after Qatar said mediators were making progress in efforts to end the war, raising hopes of an imminent end to the five-month conflict.
U.S. Treasuries rallied, with yields on interest-rate-sensitive two-year notes hovering near two-week lows as easing oil prices prompted traders to reprice for lower odds of a Federal Reserve interest rate hike in September.
However, Kansas City Fed President Jeff Schmid said on Tuesday that some monetary policy tightening was needed to bring "too high" inflation back to the Fed's 2% target.
Attention will increasingly shift to the U.S. labour market ahead of Friday's non-farm payrolls figures as markets weigh the near-term outlook for Fed policy. The odds of a hike at the September meeting have receded to a 56.9% chance from 67.2% a day ago, according to CME FedWatch.
(Reporting by Jiaxing Li; Additional reporting by Summer Zhen in Hong Kong; Editing by Shri Navaratnam and Jacqueline Wong)
