Dollar advances vs yen as BOJ dissent clouds rate-hike outlook

The US dollar gained ground against the Japanese yen on Friday after two Bank of Japan policymakers expressed dissent from an anticipated interest rate increase, sparking uncertainty among traders regarding potential future hikes. The dollar experienced a slight retreat following Japanese authorities' examination of currency market rates, viewed as a preliminary step before intervention, according to the Nikkei newspaper.

Despite the Bank of Japan raising rates to their highest level in 31 years at 1.25%, the move failed to strengthen the Japanese currency as traders felt there was a lack of explicit hawkish guidance. This decision, following a hawkish message from the Federal Reserve earlier in the week, paves the way for further dollar strength, said Steven Englander, head of G10 FX research at Standard Chartered.

The US dollar was 0.5% higher at 156.725 yen, after surging as much as 1.3% to a two-week peak of 158.05 yen. This marked its largest weekly rally since October 2025. Analysts were taken aback by the underwhelming performance, noting that unanimous approval from policymakers for the rate hike was notably absent. This lack of robustness leaves the USD poised for further gains, as indicated by Steven Englander.

The US dollar's strength may finally materialize as previously forecast for the medium to long term, said Englander. Energy prices and the US Federal Reserve continued to garner attention from FX market participants. The dollar index, which gauges the currency against six major counterparts, climbed 1.2% for the week to near a seven-week high following a US Federal Reserve interest rate hike and an indication of additional increases to come.

Traders currently estimate a 55% probability of a quarter-point hike at the Fed's upcoming meeting, up from 27% a week prior, according to the CME Group's FedWatch tool. Meanwhile, oil prices dipped to their lowest in nearly a week due to reduced supply concerns in Saudi Arabia, while China urged Iran to aid in curbing the Houthis' military campaign against Saudi Arabia following a recent incursion.

The euro edged up 0.5% to $1.1481, ending the week 1% lower after the Fed's interest rate increase, while the British pound rose 0.3% to $1.3391, buoyed by retail sales data surpassing expectations. The Bank of England maintained interest rates on Thursday but signaled potential future rate hikes. In the cryptocurrency sector, bitcoin surged 5.9% to $81,000 on Friday, marking its third consecutive day of gains, as it continued a rebound from Tuesday's significant sell-off, following the US Senate's failure to pass comprehensive cryptocurrency legislation.