Dollar retreats as rate-hike bets cool, yen steadies near 40-year low

The dollar index dipped to around 101.3, pulling back from one-year highs, though the greenback remains on track for its best month since July 2025, according to CNBC.cnbc
Japan's yen firmed to about 161.62 per dollar after nearly breaching a 40-year low, with Tokyo core inflation accelerating to 1.6% in June, bolstering the case for further Bank of Japan rate hikes.finance.yahoo+1
Bank of America predicted three Fed rate hikes starting in September, though Alpine Macro's Chen Zhao argued "the odds of actual tightening remain very low."fortune

The U.S. dollar eased against most major currencies on Friday as inflation data and Federal Reserve commentary led traders to scale back rate-hike expectations, offering relief to the Japanese yen after it touched a two-year low earlier in the week.

Dollar Pulls Back From One-Year Highs

The dollar index, which measures the greenback against a basket of six currencies, fell to around 101.3, retreating from one-year highs hit earlier in the week. Thursday's data showing a key U.S. inflation measure met economists' expectations helped temper bets on near-term rate increases.cnbc+1

The greenback remains on track for its best month since July 2025, with gains of almost 2.5%, according to CNBC. The euro traded around $1.1385, up 0.15%, while the British pound gained 0.1% to $1.3201.cnbc

The pullback follows a volatile stretch for currency markets after the Federal Reserve held rates steady at 3.50%-3.75% at its June meeting under new Chairman Kevin Warsh. Updated projections showed nine of 19 policymakers anticipating a rate hike by year-end, a shift that initially sent the dollar surging. However, some analysts remain skeptical. Chen Zhao, chief global strategist at Alpine Macro, wrote this week that "the odds of actual tightening remain very low" and that inflation should begin to decline later this year.reuters+1

Yen Recovers From Danger Zone

The yen strengthened modestly to around 161.62 per dollar on Friday, recovering from a two-year trough of 161.95 hit Thursday. Breaching 161.96 would take the currency to its weakest level since 1986.cnbc+1

Markets remained on alert for intervention from Tokyo. Finance Minister Satsuki Katayama has warned that Japan stands "ready to take decisive measures against speculative activities" in foreign exchange markets, with the finance ministry having already spent over $70 billion in May to support the currency.cnbc

Adding support for the yen on Friday, government data showed Tokyo's core consumer price index rose 1.6% year-on-year in June, accelerating from 1.3% in May. A core-core reading excluding fresh food and energy climbed to 1.9%, approaching the Bank of Japan's 2% target. The pickup came just a week after the BOJ hiked interest rates by 25 basis points and signaled more increases ahead.finance.yahoo+2

Structural Forces Keep Pressure On

Analysts have noted that intervention alone has largely failed to reverse the yen's decline, as high U.S. Treasury yields and Japan's growth-oriented fiscal policy continue to favor the dollar. Some banks have accelerated their timeline for further BOJ rate hikes following Friday's inflation data, which could provide a more durable floor for the yen. Bank of America this week predicted three quarter-point Fed rate hikes beginning in September, a forecast that, if realized, would maintain pressure on rate-sensitive currencies globally.fortune+2

Sources (30)