(Bloomberg) -- The yen’s recovery from a 20-year low is picking up pace, with options markets and analysts suggesting the rebound has some room to run.

After rising over 3% from its trough, Japan’s currency may climb back to 125 as global growth worries fuel demand for havens and U.S. yields ease, according to Shinkin Asset Management and IG Markets Ltd. Option markets indicate there’s a 64% chance the yen will strengthen past the 125 mark by end-June.

The dollar’s decline is driving the yen’s rebound as traders speculate that aggressive Federal Reserve tightening may tip the US economy into a recession. Short positioning on the Japanese currency has eased in recent weeks, offering some respite to policy makers who have sought to halt its drop with limited success.

“The yen is bound to strengthen when stocks and yields fall on wariness about the economy,” said Jun Kato, chief market analyst at Shinkin Asset in Tokyo, who has a target for the dollar of around mid-125 yen in the next two to three months. “Sentiment is tilting toward risk-aversion.”

Recent US data including new home sales are feeding fears that the Fed’s rate hikes may fuel a slowdown in the world’s largest economy. Money-market traders are pricing in about 135 basis points of rate increases over the next three policy meetings, down from around 141 basis points at Monday’s close.

Even after its rebound, Japan’s currency remains the worst performer among its Group-of-10 peers over the past three months, with a 9% drop. The yen traded around 127.00 per dollar as at 3:05 p.m. in Tokyo.

Since the Japanese currency’s decline coincided with the surge in US yields, the dollar-yen pair may fall to around 125.40 to 125.50 on the assumption that the benchmark Treasury yield could drop to its high in March of 2.55%, said Shinkin’s Kato.

“Dollar-yen is looking to test the downside as upward pressure on US yields is retreating as future growth risk makes the strong rebound in yields seen in March and April unlikely,” said Junichi Ishikawa, a senior FX strategist at IG Markets in Tokyo. “Key is 125,” with a possible test before that of the 125.86 level that served as resistance during the Abenomics era, he said.

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