Dollar recovers as Fed hints at cuts; yen firms on BOJ hawkishness

August 1, 2024

Key points:

The U.S. dollar remains soft after the Fed hints at rate cuts.
The yen strengthens as the BOJ raises rates for the first time in 15 years.

An eventful Wednesday saw the Bank of Japan (BOJ) raise interest rates to levels not seen in 15 years. This prompted traders to reassess popular carry trades before the Federal Reserve held rates steady but hinted at potential rate cuts as U.S. inflation cools.

Anticipating September rate cut while Powell tempers expectations

Markets have been fully pricing in a 25 basis points (bps) rate cut in September and have increased their wagers on the Fed going further. Powell clarified that policymakers are not considering a 50-bps cut “right now.”

Powell’s comments suggest the bar for a rate cut in September is low. They expect favourable July inflation data and believe that even neutral news could ensure a September cut. The July inflation report is due on August 14. Before that, Friday’s government jobs report for July will be in focus, expected to show an addition of 175,000 jobs.

Dollar index steady after recent decline, posts weakest month of 2024

The chart displays the 4-hour price movement of the US Dollar Index (USDX). The trend shows a slight decrease of -0.01%. The opening price is 103.810, the closing price is 103.800, the high is 103.815, and the low is 103.615. The chart includes moving averages (5, 10, 20, 30), illustrating a recent downward trend with prices falling below the moving averages. The MACD (26, 16, 9) histogram indicates bearish momentum, with the MACD line below the signal line. Trading volume shows fluctuations with a noticeable increase during the recent price drop. The chart reflects a cautious market sentiment for the US Dollar Index.

See: Dollar index trading at 103.800 on the VT Markets app.

The dollar index (DXY), which measures the U.S. currency against six peers, remained steady at 104.02 after dropping 0.38% on Wednesday. The index fell 1.7% in July, marking its weakest monthly performance this year.

The euro (EURUSD) was last at $1.0825 after a 1% rise in July, while the British pound (GBPUSD) stood at $1.2852 ahead of the Bank of England’s policy decision. The BOJ’s actions resulted in the yen (USDJPY) rising to 149.515 per dollar, its highest since mid-March, after a 1% jump on Wednesday.

BOJ hints at rate hike; plans to cut JGB purchases by 2026

The BOJ Governor Kazuo Ueda did not rule out another rate hike this year. Additionally, the BOJ announced plans to halve its monthly Japanese government bond (JGB) purchases to 3 trillion yen by January-March 2026.

BREAKING: The Bank of Japan has raised rates and introduced a plan to reduce its purchases of Japanese government bonds by half in a move that was a surprise to the markets, increasing its short-term policy rate target to 0.25% from a range of 0% to 0.1%. https://t.co/vQ6lOfSOv3
— The Japan Times (@japantimes) July 31, 2024

The BOJ’s move to increase rates was unexpected, as the recent yen rebound seemed to reduce the pressure to hike. However, the BOJ appears determined to raise interest rates and normalise policy. This could lead to more yen strength but might weigh on the local economy and equity markets.

The yen surged 7% in July, its strongest monthly performance since November 2022, buoyed by interventions from Japanese authorities totaling $36.8 billion.

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