Greenback eases from peak as oil prices extend decline; BOJ in focus

The US dollar experienced a seven-week high on Thursday (Sep 17) after the Federal Reserve increased interest rates and reiterated its determination to combat inflation, though the gains later diminished as energy prices continued their decline due to reduced concerns over supply interruptions. The Federal Reserve raised rates and signaled more hikes, with Chair Kevin Warsh affirming the central bank's independence despite repeated calls from US President Donald Trump for lower borrowing costs.

Investors' confidence in the Fed's independence could be shaken if President Trump intensifies pressure on the central bank in the coming weeks, according to Michael Pfister, a strategist at Commerzbank. Nonetheless, the Fed made efforts to alleviate these concerns.

Markets remain more hawkish than the Fed, with analysts anticipating additional rate hikes in 2026 and a pause in 2027, while investors consider more than one more increase this year and roughly three more by the end of 2027. The Fed's meeting on Wednesday signaled a clear intention to adjust monetary policy in a more restrictive manner, according to analysts.

"We see upside risk to the length and size of the hiking cycle," said James Egelhof, chief US economist at BNP Paribas, noting Warsh's comments suggested the current stance was more stimulative than necessary.

Oil prices dropped on Thursday, extending losses on reports of Saudi Arabia supplying additional crude shipments through Oman. The greenback typically benefits from higher oil prices as the US economy is less vulnerable to energy shocks compared to many other major economies, drawing demand at the expense of currencies like the euro and yen.

On Wednesday, President Trump expressed hope for a near resolution to the US-Israeli conflict in Iran and was reportedly expected to meet Gulf leaders during the UN General Assembly to discuss the issue. The dollar index, which gauges the greenback against a basket of currencies, reached 100.36, the highest level since July 31; it was down 0.1 percent at 100.20 at the close.

The euro gained 0.1 percent to US$1.1475, after dipping to its lowest point in seven weeks at US$1.1456. The British pound slipped slightly against both the euro and the dollar after the Bank of England maintained interest rates steady but cautioned that ongoing Middle Eastern tensions might necessitate tighter policy. It was down 0.1 percent at US$1.3366 and fell 0.23 percent to £0.8587 per euro.

Japan pledged to maintain orderly yen movements through close collaboration with the US, said Chief Cabinet Secretary Minoru Kihara, when asked about the Fed's decision. The Bank of Japan (BOJ) is expected to raise interest rates to a 31-year high on Friday and signal its readiness to continue increasing borrowing costs. Market participants are monitoring any indications from BOJ Governor Kazuo Ueda regarding the timing and pace of further rate increases.

Mizuho anticipates the BOJ to normalize policy, albeit at a slower pace than current market expectations, with rates potentially reaching 1.75 percent by mid-2027. The dollar/yen declined 0.43 percent to 155.65. A significant market trend is the possibility of portfolio adjustments by Japan’s Government Pension Investment Fund, with investors observing whether higher domestic yields prompt repatriation flows.

The yen surged to a seven-month high against the dollar last week, as speculative positions shifted to net-long bets on increased confidence in the BOJ's policy-tightening trajectory. Japanese retail investors, however, have maintained persistent short positions, anticipating that the yen's recent gains would prove temporary.