In Tokyo trading on the 31st, the yen held in the high ¥159 range as expectations of a U.S. rate hike kept the dollar firm. In the afternoon, yen support and dollar strength moved side by side against the backdrop of a sharp drop in the Nikkei average.
The yen was sold and the dollar bought in the morning on expectations of an early U.S. rate hike, but yen buying following a sharp drop in the Nikkei average provided downside support. In the afternoon, USD/JPY traded within a narrow range in the high ¥159s.
At 3 p.m., USD/JPY was around ¥159.83, with the dollar up 33 sen against the yen from the previous weekend. The yen weakened to ¥159.95–¥159.97 at 10 a.m., but selling then gained the upper hand and the pair fell below ¥160.
Ahead of a speech at the Federal Reserve's Jackson Hole symposium the previous weekend, USD/JPY had temporarily fallen to around ¥159.40 before being rapidly bought back to around ¥160.
The decline in the Nikkei average encouraged broad-based risk aversion, prompting active selling on rallies and profit-taking in the foreign exchange market. The combination of falling stock prices and expectations of a U.S. rate hike provided support for the dollar and weighed on the yen.
The euro moved in a narrow range against the yen, while euro selling and dollar buying strengthened against the dollar. Overall, many market participants saw limited upside.