US dollar banknotes.  (Reuters Photo)

SINGAPORE- The yen hit its highest levels in more than a year on Monday in trading thinned by a holiday in Japan, as market participants increasingly expected an oversized rate cut by the Federal Reserve later this week.

Trading in Asia was slow, with markets in Japan, China and South Korea closed for holidays.

The dollar was down 0.47 percent at 140.15 yen falling further from the 140.285 end-December low it struck on Friday to levels last seen in July 2023. It fell 1.3 percent on the yen last week.

The Fed’s Sept. 17-18 meeting is the highlight of a busy week that also has the Bank of England and Bank of Japan announcing policy decisions on Thursday and Friday.

Treasury yields have been falling in the run-up to the highly anticipated meeting, particularly as odds stack up for the Fed to get aggressive with a half-point rate cut.

Benchmark 10-year yields are down 30 basis points in about two weeks. Cash Treasuries were not traded in Asia due to the Japan holiday. Two-year yields more closely linked to monetary policy expectations were around 3.57 percent and down from roughly 3.94 percent two weeks ago.

Selling the dollar for yen has been the cleanest trade for investors looking to play the drop in Treasury yields, said Chris Weston, head of research at Australian online broker Pepperstone.

“While speculators are short and riding this lower, this trend is clearly one to align with,” and the December lows for the dollar-yen pair is one to watch, he said.

Fed speakers and data releases over the past month have had markets shifting the odds around the size of this week’s rate cut, debating whether the Fed will head off weakness in the labor market with aggressive cuts or take a slower wait-and-see approach.