Yen records biggest weekly drop in over two months, dollar climbs for the week

July 24 (Reuters) - The dollar was set for its biggest weekly gain since mid-June, buoyed by the rise in oil prices, while the yen was poised for its largest weekly percentage decline in more than two months as the currency languishes at 40-year lows despite Japan's pledges to buttress the currency. Verbal efforts to support the yen have seen muted results, with Japan's Finance Minister Satsuki Katayama once again reiterating on Friday the government's readiness to take action in the foreign exchange market.

Some analysts see another intervention by Japanese officials as likely to have only a short-lived effect, similar to recent interventions in the currency, without coordinated steps such as a more aggressive path of rate hikes by the Bank of Japan (BOJ). The U.S. Treasury Department on Thursday joined calls for rate hikes by the BOJ, warning that excessive currency volatility was undesirable.

Markets have completely priced out any chance of a rate hike from the BOJ at its policy meeting next week, according to LSEG data.

"It's not surprising that dollar-yen has gone up under the conditions that we're facing. It's a low-yielding currency facing a terms-of-trade shock with higher oil prices," said Thierry Wizman, global FX & rates strategist at Macquarie Group in New York.

"So if there's going to be a currency that the specs are going to go after in those conditions, it's going to be the yen," Wizman said. "... And so that girds the whole thesis for why it's been dollar-yen ... doing so well since the (Iran) war began, since oil prices went up."

The dollar index, which measures the greenback against a basket of currencies, inched up 0.01% to 101.46 and was up about 0.7% for the week, on track for its biggest weekly gain in five weeks.

Against the Japanese yen, the dollar weakened 0.02% to 163.81 but was up nearly 0.9% on the week, which would mark its strongest week against the currency since May 15. On Thursday, the dollar hit 163.98, its strongest against the yen since November 1986.

The dollar has been rising in recent days as renewed strikes in the Iran war have caused a reversal in oil prices and again fanned inflation fears, in turn buoying expectations the U.S. Federal Reserve may hike interest rates.

The U.S. economy is seen as more insulated from energy price shocks compared with Europe and Japan, which has also supported the dollar. U.S. crude fell 3.47% to $88.99 a barrel and Brent dropped to $96.48 per barrel, down 4.12% on the day, with Brent retreating from the two-month high of $102 hit on Thursday. Expectations for a rate hike from the Federal Reserve at its meeting next week have increased to 35.8%, up from 12.8% a week ago, as cool U.S. inflation data for June briefly supported hopes the Fed could delay rate hikes, but the escalating Iran war has rekindled concerns about price pressures.

Michael Feroli, chief U.S. economist at J.P. Morgan, said in a note he expects the Fed to leave rates unchanged at next week's meeting but looks for at least two hawkish dissents as "some on the committee are losing patience with above-target inflation." The euro slipped 0.06% to $1.1369, and was down nearly 0.6% on the week, a day after the European ​Central Bank left interest rates unchanged but kept the possibility of a September hike alive.

ECB chief economist Philip Lane said the central bank still considers the current inflation shock to be medium-sized, which requires some policy action but not aggressive moves, and it will get price growth back to 2% in the next year or so.

Traders are pricing in a 70.8% chance of a rate hike in September, according to LSEG data.

(Reporting by Chuck Mikolajczak; Additional reporting by Rae Wee in Singapore and Niket Nishant in Bengaluru; Editing by Amanda Cooper, Mrigank Dhaniwala, Will Dunham and Andrea Ricci)

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