(Bloomberg) -- The yen extended gains in Asian trading on Thursday after rallying 1% overnight as traders ramped up bets that the Federal Reserve will ease monetary policy this year on signs US inflation pressures were easing.

Japan’s currency strengthened beyond the 154 level for the first time since May 7, rising to as high as 153.6 per dollar. It gained 0.8% to 153.68 as of 10:17 a.m. in Tokyo, in an advance that helped to forestall the need for Japanese authorities to step into the market to stem weakness.

The currency has whipsawed in recent weeks, weakening beyond 160 per dollar for the first time since 1990 in late April before sharp rebounds after two rounds of suspected intervention by authorities.

Read more: US Inflation Ebbs for First Time in Six Months in Relief for Fed

Traders boosted their bets that the Federal Reserve will cut interest rates after the April US CPI report, with swaps pricing now suggesting more than a 66% chance of a quarter-point rate reduction by the September meeting. Meanwhile, wagers that the Bank of Japan will raise its rate have been growing.

“The correction from the recent yen weakness will probably accelerate if some technical levels are breached,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities Co. in Tokyo. “The move is similar to November when slower inflation dragged Treasury yields lower, which puts downward pressure on the dollar-yen pair toward year-end.”

The prospect of the world’s largest economy shifting gears and lowering interest rates was enough to send the yen higher as yields on US bonds tumbled and a Bloomberg gauge of the greenback fell to its weakest level in more than a month. The wide moat between Japan’s ultra-low and higher US borrowing rates has kept the pressure on the Japanese currency, which touched a 34-year low recently. 

The dollar-yen pair “is by far the most sensitive USD-cross to moves in the US fixed-income markets and could move the most if the US rates investors do bring forward Fed rate cuts,” said Valentin Marinov, head of G-10 foreign-exchange research and strategy at Credit Agricole.

Read more: Treasuries Soar as Traders See Easing Inflation Aiding Fed Cuts

Wednesday’s data revealed that the so-called core measure of US inflation — which excludes volatile food and energy costs — rose 0.3% from March, while year-over-year core price growth eased to 3.6%.

Over the past year, the yen has slumped more than 11%, making it the worst performing Group-of-10 currency. Sentiment was so poor that bearish wagers dominated the market even after the BOJ raised the short-term policy rate for the first time since 2007 in March. 

To stem losses, Japan is suspected to have bought the yen twice, in late April and then again in early May, spending about ¥9 trillion ($58.5 billion) in total, according to Bloomberg calculations. The nation’s top currency official, Masato Kanda, has declined to comment on whether authorities had intervened.

“CPI definitely has tje BOJ breathing a sigh of relief,” said Helen Given, a foreign-exchange trader at Monex. Still, she added, “until the Fed starts cutting, USD/JPY has a ceiling of strength at the 150 level — the interest-rate gap is still quite large.”

Despite Japan’s recent efforts, market watchers argue the yen continues to face long-term pressures. Former US Treasury Secretary Lawrence Summers said that currency interventions are ineffective at shifting exchange rates, even at the large magnitude that Japan is thought to have deployed.

--With assistance from Masaki Kondo, Yumi Teso, Brett Miller and Saburo Funabiki.

(Updates yen moves in second paragraph,)

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