Yen under pressure as Japan struggles to match hawkish global peers

The Japanese yen faced pressure on Tuesday as the dollar held firm, with traders predicting that Japan's central bank would struggle to keep pace with more hawkish policies from global counterparts, leaving the country's interest rates at a significant disadvantage compared to peers. This came amid a holiday in Japan and the possibility of potential intervention, as the Nikkei newspaper reported Japan closely monitored dollar/yen rates on Friday.

The yen initially slipped lower on Monday before trading at 157.33 against the dollar early on Tuesday. Broader financial markets, buoyed by falling oil prices, also saw gains. Other currency pairs remained relatively stable, with the euro at US$1.1467. However, cryptocurrencies experienced a surge, pushing bitcoin to an eight-month high above US$87,000.

Following the report of the BOJ rate check, the yen rebounded, but it has been under pressure since a Bank of Japan interest rate hike on Friday, which was met with two dissenting opinions. This contrasted with the Federal Reserve's rate hike last week and the hawkish stance of most other global central banks, suggesting more rate increases are expected this year.

Economist Carlos Casanova of Union Bancaire Privée noted that the roughly 275-basis-point US-Japan rate differential should persist, supporting yen-funded carry trades unless the BOJ tightens policy more rapidly than the Federal Reserve. Markets anticipate a 30% chance of the BOJ raising its benchmark short-term rate to 1.5% in October and a 55% chance that the Fed will increase its funds rate window by 25 basis points to 4% to 4.25%.

The Reserve Bank of Australia's governor Michele Bullock is expected to adopt a hawkish tone at a fireside chat later on Tuesday, with markets pricing a 90% chance of a rate hike the following week, marking the country's fourth hike this year. The Australian dollar hovered around US$0.7120. The British pound traded around US$1.3372, while the New Zealand dollar hovered near multi-month lows at US$0.5708. NZD price action appeared weak, as higher-yielding currencies benefited from better carry.