Persistent US inflation and the BOJ’s dilemma are in focus, with dollar-yen trading around the ¥158 level. While euro weakness is supporting the dollar index, developments concerning the Fed’s rate-hike outlook and the BOJ continue to provide market catalysts.
Dollar-yen traded broadly around ¥158 over the week. When the US September CPI exceeded expectations, dollar buying dominated and dollar-yen rose as high as ¥158.95. The market reaction then weakened, and the yen temporarily strengthened the following day after a speech by BOJ Policy Board member Koeda (小枝), before ultimately settling back around ¥158.
Continued euro weakness has been pushing up the dollar index, with euro-dollar at one point falling close to breaking below 1.11. Meanwhile, the rise in long-term US yields has been described as a “bad” yield increase accompanied by an expansion in the term premium, limiting the momentum of dollar strength.
Speculative positioning suggests that euro shorts may persist, while yen positions have shifted toward yen shorts, particularly among hedge funds. The market continues to react to expectations that the BOJ may accelerate the pace of rate hikes.
In the US inflation outlook, energy prices remain a major factor, with rising crude oil prices supporting elevated headline and core CPI. Whether the Fed will raise rates in October depends on trends in CIE (common inflation expectations), making the latest CIE data a key focus.
The Beige Book released this week indicated that overall economic growth remained moderate, while pointing to persistent inflation. Many market participants expected the Fed to conduct policy with inflation control as its central focus. On the BOJ side, a negative feedback loop has been cited, and views are divided over the possibility of a December rate hike and levels in the ¥160 range.
Next week, the dollar index and dollar-yen are expected to remain firm against a backdrop of rising crude oil prices, expectations for a year-end US rate hike and continued euro weakness. However, the momentum of dollar strength is expected to remain limited, with trading centered on a ¥155–¥160 range, while a renewed increase in expectations for a December rate hike is likely to affect the yen.