SINGAPORE- The US dollar was on the back foot on Thursday after the Federal Reserve opened the door for an interest rate cut in September, helping keep the yen pinned near its highest since March in the wake of a hawkish pivot from the Bank of Japan.
An action-packed Wednesday started with the BOJ raising Japan rates to levels not seen in 15 years, leading to traders reassessing popular carry trades before the Fed held rates steady but put rate cuts on the table as US inflation cools.
The yen was volatile in early trade, surging nearly 1 percent to 148.51 per dollar, its highest since mid-March before settling at 149.95.
“BOJ normalization and Fed cut in due course represent a shift from Fed-BOJ policy divergence to convergence,” said Christopher Wong, currency strategist at OCBC.
“Policy convergence should change the direction of travel for USDJPY to the downside. The risk here is that Fed doesn’t play ball,” he said.
The BOJ also announced plans to halve its monthly Japanese government bond purchases as of January-March 2026, with Governor Kazuo Ueda not ruling out another hike this year.
The yen surged 7 percent in July, its strongest monthly performance since November 2022, after starting the month rooted near 38 year lows in large part due to bouts interventions by Japanese authorities that totaled $36.8 billion.
Those interventions led to an unwinding of profitable carry trades, in which traders borrow the yen at low rates to invest in dollar-priced assets for higher returns.
Still, the yen remains hamstrung by the wide interest rate difference between Japan and the United States and is down 5 percent against the dollar so far this year.
“The BOJ showed it will play its part and this should help stabilize the yen but much of the remaining wide yield differential would need to be closed by the Fed,” said portfolio managers from the Multi Asset team at AllianzGI.
“In absence of Fed action, JPY shorts may begin to re-emerge.”
