Dollar drops, yen surges as U.S. consumer prices fall in June

(Reuters) -- The dollar dropped on Thursday after data showed headline consumer prices unexpectedly fell in June, while a sharp gain in the Japanese yen sparked speculation of a possible intervention in the currency.

The yen rose more than 2% at one point, after falling to a 38-year low against the greenback last week.

Local Japanese television station Asahi, citing government sources, said officials intervened.

Domestic news service Jiji cited top currency diplomat Masato Kanda as saying he could not comment on whether or not there was an intervention, but that recent moves in the yen were "not in line with fundamentals."

It will not be known for certain whether an intervention occurred until Japan's Ministry of Finance releases its updated figures on intervention at the end of the month.

Analysts noted that the move was likely caused by a large repositioning after the softer U.S. consumer price index (CPI) earlier on Thursday. A rate cut in September by the U.S. Federal Reserve is now seen as more certain, which will reduce the attractiveness of long dollar/yen trades.

Positioning in long dollar/yen trades and momentum indicators were also stretched heading into the data release, with many traders caught on the wrong side of the move.

"I think it was just the reaction to the weak U.S. CPI and the squeeze of the market long USD positioning. The USD weakened across the board, but more so against the JPY because of positioning," said Athanasios Vamvakidis, global head of G10 FX strategy at Bank of America Global Research in London.

Buying the dollar and selling the yen has been popular because of the wide interest rate differential between the two countries.

"A lot of this can be chalked up to a bit of unwind as people have been