Dollar Set for First Monthly Loss in July as Fed Rate Doubts Grow; Yen Erases Intervention Gains

The U.S. dollar headed for its first monthly loss in July, pressured by weaker-than-expected inflation data that has cast doubt on the Federal Reserve's plans for further interest rate hikes. In Asia, the Japanese yen erased strong overnight gains from a suspected government intervention after the Bank of Japan maintained its benchmark interest rate.

Yen Intervention Gains Prove Short-Lived

The Japanese yen saw significant volatility, with the USD/JPY pair climbing 0.7% to trade back above the 160 level on Friday. The move completely reversed a sharp rally from the previous session, where the pair had plunged nearly 3% to as low as 158 following media reports of direct intervention by Japanese authorities to support the currency.

The yen had recently fallen to a 40-year low, prompting speculation that Tokyo would act. The reported intervention was said to be coordinated with U.S. authorities, with Treasury Secretary Scott Bessent stating in an interview that the yen appeared undervalued. However, the yen's strength faded after the Bank of Japan, as widely expected, kept its policy rate unchanged. While the central bank reiterated its intention to raise rates later this year, the lack of immediate action allowed dollar-yen buyers to return.

Dollar Weakens on Fed Outlook and Inflation Data

The U.S. Dollar Index (DXY) edged up 0.25% in Friday trading but remains on track for a monthly decline of approximately 1%. The month's weakness was amplified this week after the Federal Reserve held interest rates steady. While Fed Chair Kevin Warsh reiterated a commitment to the 2% inflation target, he offered little clear guidance on the path forward, fueling market skepticism about another rate hike in 2024.

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Adding to the dollar's headwinds, the Personal Consumption Expenditures (PCE) price index for June, released Thursday, came in below forecasts. Although the core reading of this key inflation gauge, which is the Fed's preferred measure, remains above the central bank's annual target, the softer overall print reinforced the view that price pressures are easing.

Other Currencies in Focus

In broader currency markets, risk appetite remained subdued amid geopolitical concerns. The British pound and the euro both dipped 0.16% against the dollar. The South Korean won also saw a reversal, with the USD/KRW pair rising 1.1% after a sharp drop overnight attributed to suspected government intervention.

In China, the yuan saw modest moves, with the USD/CNY pair down 0.1%. The currency's direction was weighed by disappointing economic data, as Purchasing Managers' Index (PMI) figures for July showed that both manufacturing and services activity contracted during the month.