By Jiaxing Li and Ankur Banerjee
HONG KONG, Sept 4 (Reuters) - The Japanese yen turned lower against the U.S. dollar on Friday after a two-day rally, but held on track for its strongest week in more than a month as traders raised bets on a Bank of Japan interest rate hike, while broader markets awaited U.S. payrolls data.
The yen strengthened to as much as 155.25 per dollar in morning trade, just off the 155.20 high it hit last month after the July intervention, before retreating to a low of 156.45,
down 0.4%.
Still, the yen is heading for a 2.2% rise this week, its biggest weekly gain since late July, when Japan and the U.S. conducted a rare joint intervention to halt a relentless slide in the Japanese currency.
With a lack of evidence of official action, analysts say the sudden jump in the yen largely reflects bets that the Bank of Japan could be more hawkish than previously expected when it meets on September 17 to 18.
Japan's top currency diplomat Atsushi Mimura said on Friday he remained alert to exchange-rate moves and was in constant contact with U.S. authorities, keeping markets alert to the chance of another yen-buying intervention.
"I think the market is getting a little bit more jittery about what might be forthcoming effectively, and potentially the intervention threat is still there," said Ray Attrill, head of FX strategy at National Australia Bank.
"Unless we get some significant policy surprises, or much more aggressive intervention by the U.S. Fed on behalf of the yen, our view at the moment is that we are unlikely to see a sustained move below 155, at least not in the coming weeks," he added.
JPMorgan said expectations for Japanese pension funds repatriation and BOJ rate hikes "look somewhat overdone" at the moment, but warned that an unwinding of an estimated 16 trillion-17 trillion yen in yen shorts could send the dollar to a 142–146 range against the Japanese currency.
PAYROLL DATA AWAITED
The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, was a touch stronger at 99.02, leaving the euro flat at $1.1627 and sterling at $1.3533.
Attention now shifts to key data releases ahead of the Federal Reserve meeting on September 15 to 16, including nonfarm payrolls later and CPI inflation next week. The greenback was on track for a 0.7% weekly decline.
Federal Reserve Governor Christopher Waller said on Thursday he was leaning toward keeping interest rates steady at this month's policy meeting if the next batch of inflation data showed price pressures continuing to moderate.
Traders pared bets on a September rate hike after the relatively dovish comments from Waller, with the implied probabilities of a move this month back to 50%.
Investors were also watching geopolitical tensions in the Gulf and their implications for inflation, with Brent crude futures remaining elevated above $95 a barrel after U.S. strikes on Iran this week.
The New Zealand dollar was up 0.3% at $0.5899 after the central bank lifted the cash rate by 25 basis points to 2.75% on Wednesday and signalled more tightening ahead. The Australian dollar added 0.1% to $0.7209.
In cryptocurrencies, bitcoin last shed 0.3% to $80,973.97, but was on track for a 3% weekly gain as debasement fears boost momentum.
(Reporting by Jiaxing Li in Hong Kong and Ankur Banerjee in Singpore; Editing by Kate Mayberry and Jan Harvey)
