Hedge funds held their most bearish outlook on the yen since August ahead of last week's US presidential election, a sign many investors anticipated a Donald Trump victory, according to a report by Bloomberg citing data from the Commodity Futures Trading Commission (CFTC).

Speculative investors ramped up short positions on the yen for a fourth consecutive week leading up to 5 November. Following Trump’s decisive win, the yen initially fell against the dollar but later regained strength, ending the week slightly higher.

The so-called "Trump trade," which involves a stronger dollar among other strategies, rests on the president-elect’s plans for tax cuts and tariffs, which could fuel inflation and lift Treasury yields. However, the yen’s post-election bounce-back complicated this approach, as the dollar weakened and Japanese authorities signalled potential intervention to curb excessive yen volatility.

“This is more of a dollar-strengthening story, where the Trump trade narrative gained traction,” explained Shoki Omori, chief desk strategist at Mizuho Securities in Tokyo. Omori noted that traders might resume yen carry trades, borrowing in Japan’s low-interest currency to fund higher-yielding investments elsewhere.

“We see more support for yen carry trades despite potential rate hikes from the Bank of Japan in December or January,” Omori added.

Some analysts suggest that the dollar-yen direction will likely be influenced by the gap between US and Japanese short-term bond yields. If the Federal Reserve moderates its policy easing expectations, the dollar could gain further, pressuring both the yen and emerging-market currencies like the Mexican peso.

“Fed expectations are overly dovish,” wrote Torsten Slok, chief economist at Apollo Global Management, in a recent report. “The US economy remains strong, with inflation risks tilted to the upside. Markets are pricing in too many Fed rate cuts.”