The Japanese yen edged higher in Asian trading on Thursday against a basket of major and minor currencies, attempting to recover from its lowest level in 40 years against the US dollar and heading toward its first gain in four sessions, supported by limited buying interest at depressed levels.

The US currency is facing downward pressure as oil prices slide to their lowest levels in five months, reinforcing expectations that inflationary pressures on the Federal Reserve may ease and reducing the likelihood of further US interest rate hikes this year.

The yens proximity to its weakest level since 1986 has intensified speculation that Japanese authorities could intervene in the foreign exchange market to support the local currency, with traders increasingly viewing Fridays US market holiday as a potential window for action.

The Price

USD/JPY fell by less than 0.1% to 162.48, from an opening level of 162.57, after touching an intraday high of 162.60.

The yen ended Wednesday down by less than 0.1% against the dollar, marking its third consecutive daily loss and hitting a fresh 40-year low of 162.84 amid concerns over the widening yield gap between US Treasury bonds and Japanese government bonds.

US dollar

The US Dollar Index fell 0.1% on Thursday and is on track for its first loss in three sessions, reflecting a modest pullback in the greenback against a basket of global currencies.

Federal Reserve Chair Kevin Warsh said on Wednesday that inflation expectations and price risks have eased in recent weeks, while reaffirming his strong commitment to the Feds 2% inflation target.

The US private sector added fewer jobs than expected in June, while manufacturing activity slowed more than anticipated according to the latest Institute for Supply Management survey.

Those comments and economic reports have reduced expectations for at least one Federal Reserve rate hike this year. Investors now await the June US employment report later on Thursday, released 24 hours earlier than usual due to the Independence Day holiday on Friday.

According to the CME FedWatch Tool, the probability of the Federal Reserve leaving interest rates unchanged at its July meeting rose from 66% to 71%, while the probability of a 25-basis-point rate hike declined from 34% to 29%.

Markets are also pricing a 15% probability of no change by December and an 85% probability of a 25-basis-point rate increase by year-end.

Global oil prices

Oil prices fell around 0.5% on Thursday, extending losses for a third consecutive session and reaching their lowest levels in five months as tensions in the Strait of Hormuz continued to ease, allowing more supertankers to pass through the vital shipping route.

Lower oil prices are expected to reduce inflation concerns, supporting the case for major central banks to keep monetary policy settings unchanged for an extended period this year.

Japanese authorities

Japanese Finance Minister Satsuki Katayama said the government stands ready to take appropriate action against excessive exchange-rate volatility, adding that decisive measures remain on the table in line with agreements reached between Japan and the United States.

The yens decline to a 40-year low has revived speculation that Japanese authorities could return to the market after spending a record 11.7 trillion ($73.5 billion) in April and May to defend the currency against excessive moves.

Analysis and comments

Kristy Tan, Global Market Strategist at Franklin Templeton Institute, said intervention could slow the pace of the currencys decline, curb excessive speculation, and send a signal that authorities are uncomfortable with current market conditions, but it cannot change the broader trend.

Tan added that as long as investors can borrow cheaply in yen and earn higher returns through dollar-denominated assets, carry trades will continue to weigh on the Japanese currency.

Traders see Fridays US holiday as a favorable opportunity for the Bank of Japan to buy yen, as thinner liquidity could magnify the impact of any intervention while reducing its cost.

Matt Simpson, Senior Market Analyst at StoneX, said Japans Ministry of Finance would intervene if it could, but understands that it is currently swimming against the tide of a hawkish Federal Reserve.

Simpson added that if US data delivers a surprise in favor of monetary easing advocates, Japanese authorities may intervene more aggressively by taking advantage of a weaker dollar. Until then, the market is likely to view official warnings as little more than rhetoric.

Japanese interest rates

Market pricing for a 25-basis-point rate hike by the Bank of Japan at its July meeting remains below 25%.

Investors are awaiting additional data on inflation, unemployment, and wage growth in Japan to reassess those expectations.