The U.S. dollar broadly weakened on Monday, with a particularly sharp decline against the yen, as investors anticipated a dovish tone in the Federal Reserve’s July policy meeting minutes and in Fed Chair Jerome Powell’s upcoming speech at Jackson Hole.
The minutes, scheduled for release on Wednesday, and Powell’s speech on Friday are expected to be key influences on currency movements this week. Additionally, the week will feature inflation data from Canada and Japan, along with Purchasing Managers’ Index readings from the U.S., eurozone, and the UK.
The dollar dropped over 1% against the yen, falling to 146.01, having earlier slipped below the 146 yen mark.
Analysts attributed this significant decline to overall dollar weakness, as well as the potential for further divergence in monetary policy between the U.S. and Japan.
Kazuo Ueda, Governor of the Bank of Japan (BOJ), is scheduled to appear in parliament on Friday, where he is expected to discuss the central bank’s decision last month to raise interest rates.
“This move seems largely driven by the dollar, but the market is also likely positioning itself for policy divergence to become evident later in the week, with Powell potentially signaling a rate cut in September at the Jackson Hole conference, while BOJ’s Ueda might maintain a hawkish stance,” said Charu Chanana, head of FX strategy at Saxo.
The BOJ’s hawkish shift last month contributed to the market turbulence in early August, following the unwinding of yen-funded carry trades, which led to a significant selloff in risk assets and a sharp drop in stock markets, including the Nikkei.
The volatility at that time was exacerbated by a series of weaker-than-expected U.S. economic data, especially a disappointing July jobs report, which raised fears of a looming recession in the world’s largest economy and concerns that the Fed was slow in easing rates.
Elsewhere, the euro was last trading at $1.1043, edging closer to a seven-month high of $1.10475 reached last week. The British pound rose to a one-month high of $1.2960 earlier in the session and was last at $1.2957.
The dollar index, which measures the currency against a basket of others, fell to a seven-month low of 102.11.
Traders have fully priced in a 25-basis-point rate cut from the Fed in September, with a 24.5% chance of a 50 bp cut. Futures indicate expectations for more than 90 bps of easing by the end of the year.
“Markets will be closely watching Powell’s remarks at the end of this week. It could be a great opportunity for him to either validate or challenge current market pricing,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.
“I believe he’ll at least signal a rate cut at the September meeting. However, he might also aim to keep options open since there’s still more data to come before the next meeting.”
The Australian and New Zealand dollars both reached one-month highs of $0.6694 and $0.6086, respectively, as market sentiment improved on expectations of a dovish Fed outcome.
The Australian dollar was also bolstered by reduced expectations for immediate rate cuts, following comments from Reserve Bank of Australia Governor Michele Bullock on Friday, stating it was too early to consider easing policy.
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