The Dollar Index (DXY) has weakened, hitting its lowest point against the Japanese Yen this year.
The US general election in November remains in the spotlight, with prediction markets showing a tight race between Vice President Kamala Harris and former President Donald Trump following the recent presidential debate.
Meanwhile, declining US long-term Treasury yields, reaching their lowest levels since mid-2023, have dampened the dollar’s appeal.
In contrast, the Japanese Yen has gained support from the hawkish stance of BoJ policymaker Junko Nakagawa, who signaled a willingness to raise rates if inflation meets forecasts. As the Fed begins its easing cycle in September while the BoJ maintains a gradual tightening approach, the narrowing interest rate differentials could lead to further weakness in USDJPY.
Markets are closely monitoring the upcoming US inflation report, which should underscore the disinflation trend. Moreover, recent disappointing US jobs data, bolstering expectations of significant Fed rate cuts, have contributed to the dollar’s decline. Currently, markets are pricing about a 70% chance of a 25 basis points rate cut at the next Fed meeting, with a 30% chance of a more substantial 50 basis points cut. While broad-based dollar weakness may persist as price pressures ease, this is unlikely to affect the extent of the Fed’s rate cut as attention shifts to the US labor market.
