The dollar is propping up the yen

• US involvement in currency interventions is weakening the dollar.
• The ‘hawkish’ tone of Fed members gave only temporary support for the greenback.

The US dollar recorded its worst monthly performance since April amid doubts over Kevin Warsh’s hawkish views and the US’s intention to shift from air strikes to diplomacy in the Middle East. Speculators are unwinding their net long positions in the greenback, which had been at record levels since 2015. The USD index is falling even against a backdrop of high Treasury bond yields. The simultaneous sell-off of both the currency and Treasuries points to a decline in confidence in the policies pursued by the White House and the Fed.

Investors are concerned about the U.S. participation in currency interventions coordinated with Japan. Over three trading days, USDJPY plummeted to its lowest level since early May. The scale of intervention on the first of these days is estimated at $54 billion. Washington makes no secret of its presence on the forex market. US Treasury Secretary Scott Bessent stated that the Treasury would not hesitate to re-enter the foreign exchange market. Donald Trump described the intervention as a sign of friendship with Tokyo.

The Bank of Japan did not need to adopt hawkish rhetoric to strengthen the yen, keeping its overnight rate at 1%. Kazuo Ueda stated that greater attention needed to be paid to the acceleration in price growth. This was interpreted as a signal that monetary policy would be tightened in the autumn. The BoJ is unlikely to wait until December, as most Bloomberg experts predict.

Will it follow the Fed’s path of monetary tightening? Judging by the hawkish comments from dissenting voices such as Neel Kashkari, Beth Hammack, and Lorie Logan, the central bank would do well to raise rates in small steps rather than by 50 or 75 basis points if inflation spirals out of control. Tom Barkin believes that the time is coming to reverse the monetary policy easing measures implemented at the end of 2025.

Such rhetoric from FOMC officials allowed the USD index to recoup almost half of the losses incurred during trading on 30 July. However, coordinated currency interventions and a rally in US stock indices brought everything back to square one. The dollar plummeted to its lowest levels since mid-June.

TACO, or ‘Trump Always Chickens Out’, could add fuel to the sell-off. The US President has called off planned strikes against Iran to engage in negotiations. The White House is prioritising diplomacy, which is leading to a fall in oil prices and putting pressure on the greenback.

The FxPro Analyst Team