Dollar Holds Weekly Gains as Yen Hovers Near 40-Year Low

Dubai | EcoPulse24

Dollar Supported by Fed Rate Expectations

The US Dollar Index (DXY) steadied around 101.5 on Friday, remaining on track for a weekly gain as investors continued to expect the Federal Reserve to raise interest rates later this year.

The dollar eased briefly after the latest US Personal Consumption Expenditures (PCE) inflation report came in broadly in line with market expectations, helping to ease concerns over a sharper acceleration in inflation while keeping the Fed's inflation outlook largely unchanged.

Markets are currently pricing an 80% probability of a Federal Reserve rate hike in December, while the likelihood of an increase in September stands at around 63%.

New York Federal Reserve President John Williams also said inflationary pressures are expected to moderate this year but remain well above the central bank's long-term target.

Yen Remains Near Its Weakest Level Since 1986

Meanwhile, the Japanese yen traded around 161.7 per US dollar, remaining close to its weakest level in nearly four decades despite fresh signs of strengthening domestic inflation.

Data released Friday showed that Tokyo's core inflation accelerated for the first time in eight months, reinforcing expectations that the Bank of Japan (BOJ) will continue gradually tightening monetary policy.

Earlier this week, BOJ Governor Kazuo Ueda reiterated that future interest-rate decisions would remain dependent on economic conditions, inflation and financial market developments. Board member Naoki Tamura also advocated raising interest rates every few months as inflation continues to firm.

The Bank of Japan is scheduled to announce its next monetary policy decision on July 31.

Interest Rate Gap Continues to Weigh on the Yen

Despite stronger inflation data, repeated verbal intervention from Japan's Finance Ministry and previous currency market interventions have done little to support the yen.

The Japanese currency remains under pressure as investors continue to focus on the wide interest-rate differential between the United States and Japan, with expectations that US monetary policy will remain tighter than Japan's over the coming months.

EcoPulse24 Data Snapshot

EcoPulse24 Analysis

Currency markets continue to be driven primarily by the divergence in monetary policy expectations between the United States and Japan.

Although stronger inflation in Japan has reinforced expectations that the Bank of Japan will continue raising interest rates, markets still expect the pace of tightening to remain significantly slower than that of the Federal Reserve. As a result, the yield differential between US and Japanese assets continues to favor the dollar, limiting the yen's ability to recover despite improving domestic inflation data.

Unless expectations for US interest rates change materially or the Bank of Japan adopts a more aggressive tightening path, the interest-rate differential is likely to remain a key driver of dollar-yen movements in the near term.