A divergence is emerging among leveraged funds on their positions in the yen ahead of U.S. Federal Reserve and Bank of Japan meetings that will dictate the currency’s near-term trajectory.

The yen’s dramatic start to the week, which saw it briefly surge beyond the closely watched ¥140 per dollar line, has triggered a rethink for investors. Some short-term funds locked in profits ahead of the monetary policy decisions this week, while others are looking to increase their long-yen positions on bets for a large interest-rate cut by the Fed.

"We have seen some longer-term players squaring up the long-yen positions they put on earlier,” said Antony Foster, head of Group-of-10 spot trading at Nomura Holdings in London. "But there is still speculative interest in adding to downside dollar and cross-yen positions.”

The yen has gained more than 4% this month versus the dollar amid expectations the U.S. central bank will start cutting interest rates this week. It was trading around ¥140 to the dollar in Tokyo trading Tuesday.

The risk for funds holding long-yen positions against the dollar into the decision is that the Fed doesn’t make a large cut, which could see the dollar rebound. Swap markets are pricing in about a 70% probability of a 50 basis-point Fed rate cut on Wednesday.

"The dollar and dollar spot index have been under pressure as the market pricing has gotten to quite extreme levels,” said Martin Whetton, Sydney-based head of financial markets strategy at Westpac Banking. "The risk in the short term is the market gets some sort of disappointment, which may lead to position unwinds across various asset classes.”