Fed's Rate Cut Hint Weakens Dollar Amid BOJ's Hawkish Stance

The US dollar was soft on Thursday after the Federal Reserve suggested an interest rate cut in September. This came after the Bank of Japan raised rates, causing the yen to strengthen. Markets are now pricing in significant rate cuts, and upcoming US job reports and inflation data will be crucial.

The U.S. dollar weakened on Thursday following the Federal Reserve's indication of a possible interest rate cut in September, keeping the yen close to its highest level since March after a hawkish move from the Bank of Japan.

Wednesday's events saw the BOJ raising Japan's rates to 15-year highs, prompting traders to reconsider popular carry trades just as the Fed held its rates steady but left the door open for cuts as US inflation cools. Fed Chair Jerome Powell mentioned, "If we were to see inflation moving down ... more or less in line with expectations, growth remains reasonably strong, and the labor market remains consistent with current conditions, then I think a rate cut could be on the table at the September meeting."

Markets have long anticipated a 25 basis points (bps) rate cut in September and now forecast 72 bps of easing for this year. Goldman Sachs strategists noted that Powell's comments suggest a low bar for a September cut, pending favorable July inflation data and a crucial jobs report expected to show an addition of 175,000 jobs.

The dollar index, measuring the US currency against six peers, remained steady at 104.02 after a 0.38% drop on Wednesday. The index saw a 1.7% decline in July, its weakest month this year. Meanwhile, the euro and sterling experienced modest gains amid uncertain rate cut expectations from the Bank of England.

The yen surged to 149.515 per dollar on Thursday, the highest since mid-March, following a 1% rise on Wednesday as BOJ Governor Kazuo Ueda left the door open for another hike this year. The BOJ also plans to halve its monthly Japanese government bond purchases to 3 trillion yen by early 2026.

"I was surprised by how hawkish the move was," said Ben Bennett, Asia-Pacific investment strategist at Legal and General Investment Management. "I thought the yen's recent rebound had reduced pressure to hike. However, the BOJ seems keen to normalize policy, likely resulting in more yen strength but potentially affecting the local economy and equity markets." The yen rose 7% in July, its strongest monthly performance since November 2022, bolstered by interventions totaling $36.8 billion.

(With inputs from agencies.)