Yen Slips as BOJ Lags Hawkish Turn by Global Central Banks

The yen remained under pressure from a firm dollar on Tuesday, as traders bet that Japanese policymakers will struggle to match the hawkish stance adopted by other major central banks, leaving a wide interest-rate gap in place.

Currency moves were muted by a holiday in Japan and by the risk of official intervention, after a report that Japanese authorities checked dollar-yen rates on Friday — a step often seen as a precursor to entering the market. After easing on Monday, the yen traded at 157.33 per dollar early on Tuesday, while broader markets drew support from softer oil prices.

Other major pairs were largely stable, with the euro at $1.1467. Cryptocurrencies extended gains, lifting bitcoin to an eight-month high above $87,000.

Apart from a brief bounce following the rate-check report, the yen has been weighed down since the Bank of Japan raised interest rates on Friday, a decision accompanied by two dovish dissents. That contrasted with the Federal Reserve, which also hiked last week, and with most other global central banks, whose hawkish signals have markets pricing further increases this year.

"Unless the BOJ tightens policy more rapidly than the Federal Reserve, the approximately 275-basis-point US-Japan rate differential should continue to support yen-funded carry trades," Carlos Casanova, senior Asia economist at Union Bancaire Privée, said in a note to clients. He expects dollar-yen to rise to 160 by year-end before easing moderately to 156 by mid-2027.

Markets are pricing about a 30% chance that the BOJ lifts its benchmark short-term rate to 1.5% in October, and roughly a 55% chance that the Fed raises its funds rate window by 25 basis points to 4% to 4.25%.

Reserve Bank of Australia Governor Michele Bullock is expected to sound a hawkish note at a fireside chat later on Tuesday, with markets assigning a 90% probability to a rate hike next week — the country's fourth this year. The Australian dollar hovered at $0.7120, while sterling traded around $1.3372.

The New Zealand dollar stayed pinned near multi-month lows at $0.5708, with kiwi rates at 2.75% sitting well below those of peers. ANZ analysts noted that the currency's price action looks weak as higher-yielding currencies benefit from better carry, adding that even about five more official cash rate hikes would not bring the OCR close to the US federal funds rate or the RBA cash rate, both of which are expected to keep rising.