The Bloomberg Dollar Spot Index experienced its steepest decline in over two weeks, dropping 0.6% on Thursday, pushing the dollar to its weakest point since May. This downturn was largely attributed to remarks made by Federal Reserve Governor Christopher Waller, who indicated positive developments in inflation control. The yen, a key component of the G10 currencies, led the gains, strengthening by approximately 2% against the dollar. This surge in the yen was fueled by increased market speculation regarding potential interest rate hikes by the Bank of Japan and ongoing vigilance for signs of intervention from Japanese authorities to bolster their currency.
The dollar's fall on Thursday pushed it to the lowest level since May. This movement came as traders adjusted their expectations for a September rate hike by the Federal Reserve. Waller's comments, suggesting that if upcoming data confirms cooling inflation, he would favor keeping interest rates steady, significantly reduced the perceived likelihood of a rate increase. The market's pricing for a September Fed hike fell to roughly a 50% chance, down from approximately 63% in the prior session.
Conversely, expectations for the Bank of Japan's monetary policy shifted dramatically, with traders now fully pricing in a 25 basis point rate hike at the September 17-18 meeting, and some even anticipating a further increase in December. This more hawkish outlook for the BOJ, coupled with a suspected market intervention, provided substantial support for the yen, capping any meaningful upside for the USD/JPY pair. The yen's strong performance positioned it for its best weekly gain in over a month, up about 2.5%.
Despite the dollar's overall weekly decline, it saw a modest rebound to the 156 yen range on Friday in Tokyo, recovering from a brief dip to the lower 155 yen level. This recovery was driven by position adjustments and profit-taking ahead of the crucial U.S. Nonfarm Payrolls report and some dip-buying as traders viewed the dollar's prior decline as excessive. However, the yen's strength and the implications of Waller's comments continued to weigh on the dollar, with the greenback on track for a 0.7% weekly decline.
