US, Sep 14 : The US dollar remained broadly stable on Monday, while the Japanese yen held close to a seven-month high as investors prepared for a crucial week of central bank decisions from the US Federal Reserve and Bank of Japan.
Currency markets are closely watching the direction of interest rates as policymakers confront renewed inflation risks and heightened volatility across global financial markets. The sharp rise in energy prices has complicated expectations for monetary policy and increased uncertainty over the timing and pace of future rate adjustments.
The European Central Bank raised interest rates last week and signalled that additional increases could follow. Attention has now shifted to the Federal Reserve, which is scheduled to announce its policy decision on Wednesday, followed by the Bank of Japan on Friday. The Bank of England is expected to keep rates unchanged on Thursday, although the decision could be closely contested among policymakers.
Inflation Data Raises Fed Rate Expectations
Investors increased their expectations for a Federal Reserve rate hike after US data released on Friday showed consumer prices accelerating in August. According to the CME FedWatch tool, markets were pricing in an 86% probability of an increase at this week’s meeting, along with expectations for another move later in the year.
Shane Oliver, chief economist and head of investment strategy at AMP, said the central bank could choose to delay action, but waiting too long could create difficulties because its October meeting comes shortly before the US midterm elections.
The euro was recently trading around $1.159, while the British pound stood near $1.3524. The US Dollar Index, which measures the greenback against six major currencies, was little changed at 99.15 after recording modest declines for two consecutive weeks.
US Treasury yields also remained elevated. The two year Treasury yield, which is particularly sensitive to expectations for Federal Reserve policy, edged down to 4.6148% after climbing 26 basis points last week.
Despite higher yields and shifting expectations for interest rates, the dollar has struggled to gain significant ground. Other major central banks are also expected to maintain or tighten policy, while concerns over the credibility of US monetary policy continue to influence investor sentiment.
Analysts at ING said a rate increase could provide some support for the dollar by reinforcing confidence in the Federal Reserve’s policy stance. However, they cautioned that any gains could remain limited if markets view the move as a recalibration rather than the beginning of a prolonged tightening cycle.
Oil Prices Add to Inflation Concerns
Energy markets are adding another layer of uncertainty for central banks. Brent crude futures climbed nearly 3% to around $107.51 a barrel in early Asian trading.
Fresh attacks in the region, including Houthi strikes on Saudi Arabia and Iranian attacks on vessels in the Gulf, have intensified concerns over energy supplies. The closure of a key Saudi oil pipeline has also contributed to worries about disruptions.
A sustained increase in crude prices could add pressure to consumer inflation and make the task of central banks more difficult as they assess whether higher energy costs will become embedded in broader price trends.
Yen Holds Strong Ahead of BOJ Decision
The yen was trading around 153.49 per US dollar on Monday, remaining close to the seven-month high of 152.89 reached last week.
The Japanese currency has strengthened sharply this month as investors increasingly anticipate that the Bank of Japan will continue raising interest rates. The yen has gained about 4% in September, supported by expectations of faster policy normalisation and signs that Japanese investors could repatriate overseas assets.
Speculative positioning has also shifted. Traders have moved to a net-long position in the yen for the first time since February, signalling a notable change in sentiment toward the currency.
Analysts at MUFG said a 25-basis-point increase by the BOJ was already almost completely reflected in market prices. They added that further yen appreciation would depend on whether policymakers indicate that additional rate increases could follow at a relatively rapid pace.
TD Securities analysts warned that if the BOJ fails to keep further increases on the table for either its October or December meetings, the dollar could quickly rebound against the yen toward the 157-160 range.
James Athey, fixed income portfolio manager at Marlborough, said failing to raise rates would be a serious policy mistake, while weak communication could also undermine the currency’s recent momentum.
Expectations surrounding the repatriation of overseas investments by Japanese institutions and possible changes to asset allocation by the Government Pension Investment Fund are also contributing to the yen’s recent gains.
With the Federal Reserve and Bank of Japan decisions approaching, investors are preparing for potentially sharp moves across currency, bond and commodity markets as they reassess the outlook for global interest rates.