Yen’s weekly loss puts pressure on Bank of Japan

The yen experienced its largest weekly decline in nearly a month, dropping to its lowest levels in 40 years against the US dollar. This drop came as the impact of US and Japanese interventions began to fade, leaving traders speculating that either rate hikes or additional official buying would be necessary to halt the decline. The currency had already shed half of its gains from the interventions that occurred in late July and early August, trading at ¥159.15 per dollar, or near 40-year lows around ¥164 per dollar before July's intervention.

Mark Dowding, CIO for fixed income at RBC BlueBay Asset Management, noted that traders are closely watching the ¥160 level as a possible trigger for further official action. In Japan, there is growing belief that the Bank of Japan (BOJ) may need to raise rates at its September meeting to prevent further downward pressure on the yen. Since concluding its decade-long stimulus program in 2024, the BOJ has been raising interest rates roughly twice a year.

The broader currency market remained relatively stable, supported by inflows into US tech stocks, higher oil prices, and Middle East tensions, all of which offset the dollar's strength. However, the possibility of a September rate hike in the US, now at roughly a 35% chance, reduced expectations of further US rate increases. Meanwhile, the euro rose slightly to US$1.1563, and the British pound also strengthened to US$1.3537, both showing gains compared to the previous week.

The US dollar's decline this month has been hampered by the ongoing drop in short-term US rates, but this development has not yet led to another significant drop in the dollar following the month-end sell-off. Lee Hardman, a senior currency analyst at MUFG, suggested that the US dollar might be benefiting from inflows into US equity markets, particularly in AI-related stocks.

In other currency news, the Swiss franc continued to lose value relative to the euro, briefly reaching a high of about 0.94 francs, its highest since August 2025. The franc's decline could be attributed to fears of yen intervention, leading traders to shift funds out of the franc, which has a low yield, rather than into the yen.

Additionally, a surprisingly low inflation expectations reading weakened the New Zealand dollar, but it recovered as swap markets maintained an 85% chance of a rate hike in September, with the kiwi now trading at US$0.5887.