The Bloomberg Dollar Spot Index dropped 0.6% on Thursday, marking its worst daily performance in over two weeks, following Federal Reserve Governor Christopher Waller's remarks on inflation progress. This decline pushed the dollar to its lowest point against a basket of currencies since May.
Simultaneously, the Japanese yen led gains among G10 currencies, jumping approximately 2% against the dollar. This significant appreciation was driven by growing market expectations for Bank of Japan interest rate hikes, with the central bank's next policy decision anticipated on September 18. Traders are also on high alert for signs of potential Japanese government intervention to bolster the yen.
The yen's surge saw it briefly touch 155.28 per dollar, its strongest level in a month, and it was trading around 155.40 per dollar. Atsushi Mimura, Japan's Vice Finance Minister for International Affairs, stated that authorities were "neither satisfied nor reassured" by recent moves and remained on "heightened alert." While some analysts, like Japan Macro Advisors' chief economist Takuji Okubo, considered the possibility of intervention, others, including ING's Chris Turner, suggested the move was more likely tied to hawkish comments from BOJ officials rather than stealth intervention.
The increased speculation for a BOJ rate hike this month comes after hawkish comments from BOJ board member Hajime Takata, who suggested the central bank should hike rates "nimbly" in response to rising inflation. BOJ Governor Kazuo Ueda also kept the door open for higher rates. A September rate hike is now nearly fully priced in by markets. However, a potential Federal Reserve rate hike this month, as suggested by ING's Turner, could still provide support for the dollar against the yen, indicating that a sustained rise in the yen would require a more hawkish BOJ stance and new initiatives to encourage domestic investment in Japan.
Japan spent a record 15.4 trillion yen (approximately $98 billion) between July 30 and August 26 to support the yen, with the U.S. also participating in a coordinated effort in late July, though the exact U.S. contribution was not disclosed. Prolonged yen weakness could lead Japanese investors, who are the largest overseas holders of U.S. Treasuries with about $1.1 trillion, to reduce their holdings.
