The dollar steadied against the yen in Asian trade on Thursday after the Federal Reserve held rates, with USD/JPY around 163.6 and the Japanese currency near multi-decade lows. Investors have shifted focus to the Bank of England's decision later on Thursday and the Bank of Japan's meeting on Friday.
The U.S. dollar steadied in Asian trade on Thursday after the Federal Reserve left interest rates unchanged, while Chair Kevin Warsh reiterated that inflation must return to target, reinforcing a higher-for-longer rate outlook. USD/JPY traded around 163.6, keeping the currency near multi-decade lows ahead of Friday's Bank of Japan policy decision.
Warsh's inflation message underpins the greenback
Warsh's comments helped underpin the greenback, lifting the US Dollar Index about 0.2% to 100.98 after overnight losses. Asian currencies traded in narrow ranges, with the Australian dollar slipping about 0.1% against the greenback.
Markets now price roughly a 64% probability of a September rate hike, down from around 81% before the Fed's policy announcement, according to CME FedWatch. DBS Senior FX Strategist Philip Wee said the decision proved less hawkish than some investors had expected after speculation over a surprise increase intensified in recent weeks. Wee added that Warsh's continued emphasis on inflation should help support the dollar over the medium term, even though the meeting stopped short of explicitly endorsing another increase in September.
InvestingLive noted the dollar weakened across the board in the previous session despite three dissenters voting for a rate hike — Logan, Hammack and Kashkari.
BOE decision lands before the BOJ
Attention turns to the Bank of England, where policymakers are widely expected to keep interest rates unchanged later on Thursday, although investors remain alert to any surprise tightening that could support sterling. Focus then shifts to Tokyo, with traders looking for firmer guidance on future policy tightening after prolonged weakness in the yen renewed speculation over further normalisation.
Renewed Middle East tensions also stayed in focus after the U.S. launched fresh strikes on Iranian targets in retaliation for what Washington said was an attempted attack on American forces, prompting investors to reassess regional risk appetite.
Yen traders wait on Ueda
The Bank of Japan is expected to hold rates steady on Friday while upgrading growth forecasts and potentially its near-term inflation outlook, according to InvestingLive. Traders brought forward rate-hike expectations after a Bloomberg report last week suggested some BOJ officials viewed the weaker yen as adding upside inflation risks, with a 70% chance of a move in October now priced against December before the report.
Japanese officials might start looking for stealth interventions to slow the depreciation, though the trend is unlikely to change without a dovish repricing in Fed rate expectations or a faster BOJ tightening pace. For now the pair is consolidating around the cycle highs, with sellers needing a break below 162.85 to pile in for a drop into the 160.50 support next.
Sources: Forex News (Investing.com), InvestingLive (ForexLive)
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