The dollar firmed and the yen held near a seven-month high on Monday as traders positioned for this week's Bank of Japan and Federal Reserve decisions. Rising oil prices tied to Middle East tensions are adding a further complication for both central banks.
The U.S. dollar index rose 0.2% to around 99.35 on Monday as traders raised bets on a Federal Reserve rate hike this week. The yen, however, held near a seven-month high, with USD/JPY trading at 153.49, not far from the 152.89 low hit the previous week.
BOJ builds toward a quarter-point hike
Market consensus points to the Bank of Japan delivering a 25 basis point rate hike at its September 17-18 meeting. Speculators have turned net long on the yen for the first time since February 2026. The currency is up about 4% this month as investors price a faster BOJ tightening cycle.
But the hike itself may not be enough: analysts caution that if the BOJ raises rates without signaling further tightening, USD/JPY could snap back toward the 157-160 range. US Treasury Secretary Scott Bessent's recent comments have added another layer of pressure toward yen strength, reportedly affecting carry-trade positions.
Fed odds climb after August inflation
Markets now see an 86% probability of a Federal Reserve rate hike at its September 16 meeting, according to CME FedWatch, after US consumer inflation accelerated in August. The two-year Treasury yield was hovering around 4.61%, a level that reflects expectations for continued Fed hawkishness. The 10-year yield stood near 4.97%.
Oil adds a geopolitical wildcard
Brent crude rose nearly 3% to $107.60 a barrel after fresh attacks in the Middle East added to supply concerns. Oil prices have climbed above $100 a barrel amid escalating tensions involving the US and Israel in Iran. For Japan, which imports the vast majority of its energy, expensive oil is a structural headwind that widens the trade deficit and complicates the BOJ's calculus around further tightening.
If the BOJ hikes and signals more tightening while the Fed holds steady or strikes a balanced tone, USD/JPY could break convincingly below 153. If the BOJ hikes without forward guidance alongside a hawkish Fed, the pair could move back toward 157 or higher.
Sources: Crypto Briefing, Forex News
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