The yen traded near a six-week high against the US dollar on speculation the economy is strong enough to prompt the Bank of Japan (BoJ) to raise interest rates this week.
Investors see a 61 percent chance of the central bank increasing borrowing costs to 0.5 percent at the end of a two-day meeting starting today, according to calculations by Credit Suisse Group.
The yen last week saw its biggest five-day advance since May after a government report showed Japan's economy grew at the fastest pace in almost three years last quarter.
"The yen will remain on a stronger tone going into the BoJ meeting," said Michiyoshi Kato, a senior currency dealer in Tokyo at Mizuho Corporate Bank Ltd, a unit of Japan's second-largest lender by assets. "A rate hike narrows the interest-rate differentials between Japan and other major economies."
The yen traded at 119.36 per US dollar at 7:20am in London compared with 119.43 in New York on Feb. 16, when it reached 118.99, the strongest since Jan. 9. Japan's currency was at 157.04 per euro from 156.89. The US dollar traded at US$1.3155 per euro from US$1.3138.
Japan's currency may strengthen to 117.80 per US dollar this week should the BoJ raise rates, Kato said.
Gains in the yen may accelerate should it break 119, where traders have orders to buy, said Luke Waddington, head of interbank currency sales in Tokyo at Royal Bank of Scotland Group Plc. The yen may rise to 117 per US dollar should the central bank raise rates this week, he said.
The BoJ has kept its benchmark rate at 0.25 percent after lifting it for the first time in almost six years in July. By comparison, the Bank of England's benchmark is 5.25 percent and the European Central Bank's is 3.50 percent.
Economists are divided over whether BoJ Governor Toshihiko Fukui will lift rates, with 23 out of 49 predicting he will boost the overnight lending rate tomorrow, according to a Bloomberg survey.
Trading should be about 60 percent to 70 percent of normal, exaggerating moves, as the US and several Asian markets are closed for holidays, said Robert Rennie, chief currency strategist at Westpac Banking Corp in Sydney.
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