Yen slumps to lowest level since 1986

STORY: The yen dropped to its lowest level since 1986 against the dollar on Wednesday (June 26).

The U.S. dollar traded at 160.39 yen, with Japan's currency hurt by a large interest rate gap between it and the U.S.

The move alerted markets as they look for signs of intervention from Japanese authorities to boost the struggling currency.

Analysts said traders were testing the resolve of Japan's Ministry of Finance and central bank.

Authorities spent $62 billion in late April and early May to support the currency when it fell past 160.

Japan has also raised interest rates this year to a range of zero to 0.1%.

But U.S. rates of up to 5.5% mean investors are flocking to the higher returns on dollar assets.

That has driven up the currency versus the yen.

Top currency diplomat Masato Kanda said Monday Japan was always ready to take action against excessive market moves.

But traders ignored the warning after the last round of intervention did little to stop the selling.

There is a chance of a further rate hike from the Bank of Japan in late July, which could help support the yen.

But any durable rally is likely to require Federal Reserve interest rate cuts.

Friday's U.S. personal consumption expenditure inflation report will be key for currency markets.

A lower-than-expected number could cause traders to raise their bets on Fed rate cuts this year.

And that in turn could give some relief to Japan's currency.