Bank of Japan Hikes Rates, Yet Yen 'Plummets'...Strong Dollar Drags Down Euro Too

▲ Japan, Dollar (USD), Yen (JPY)/AI Generated Image

The dollar maintained its robust strength as the hawkish stance (favoring monetary tightening) of the U.S. Federal Reserve (Fed) continued. Despite the Bank of Japan (BOJ) raising its benchmark interest rate to its highest level in over 30 years, the value of the yen plummeted.

According to FX Leaders on September 21 (local time), the dollar index, which indicates the dollar's value against a basket of six major currencies, rose by more than 1% last week and stabilized above the 100.00 level. The Fed's hawkish rate hike decision on September 16 strongly supported the dollar's strength.

The strong fundamentals of the U.S. economy also bolster expectations for further rate hikes. Nordea stated in a report that the U.S. economy still shows signs of overheating, employment is robust, while indications of slowing inflation are minimal. Nordea predicted that the Fed would undertake two more rate hikes in the future. It is assessed that if inflationary pressures do not subside, there is a risk of even stronger tightening, creating an environment where other major central banks find it difficult to compete with the dollar.

Among the G10 currencies, the yen's weakness was the most pronounced. The USD/JPY exchange rate surpassed 158.00 yen last Friday, reaching a two-week high. Despite the Bank of Japan raising its benchmark interest rate by 0.25 percentage points to 1.25%, its highest in over 30 years, yen selling intensified on the same day. The rate hike decision was split 7-2, and BOJ Governor Kazuo Ueda's ambiguous stance on the timing of future rate hikes fueled the yen's depreciation.

European currencies are also unable to seize opportunities for a rebound, weighed down by political uncertainty. The EUR/USD exchange rate continued to trade below 1.1500 dollars. The unstable political situation of Germany's coalition government burdened the euro, while European Central Bank (ECB) President Christine Lagarde's speech in Frankfurt was merely an attendance at an event, having a limited impact on the market.

International gold prices slipped slightly to the $4,350 per ounce level. The strong dollar exerted downward pressure, but geopolitical risks in the Middle East prevented further declines. Iran's Islamic Revolutionary Guard Corps (IRGC) warned over the weekend that it would respond with new weapons and in other regions if the U.S. takes military action. The upcoming trade summit between U.S. President Donald Trump and Chinese President Xi Jinping, and discussions on artificial intelligence (AI) risk management, scheduled for later in the week, emerged as key variables for global financial markets.

The Fed's warning of further tightening, coupled with the weakening of major currencies, continues the dollar's dominant run. With the effect of the Bank of Japan's rate hike rendered moot, the U.S.-China summit and the situation in the Middle East are expected to determine the direction of the exchange rate market.

[Article Key Summary]

-Amid the Fed's hawkish stance, the dollar index maintained its strength, trading above the 100.00 level.

-Despite the Bank of Japan raising interest rates to 1.25%, the USD/JPY exchange rate surpassed 158 yen, intensifying yen weakness.

-Nordea forecast two additional Fed rate hikes, and the euro continued its weakness below $1.15.

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