Yen Slides as BOJ Holds Rates, Reversing Intervention Gains; Dollar Set for July Loss

The U.S. dollar is poised for its first monthly loss since April, pressured by softer inflation data and ambiguity surrounding the Federal Reserve's future interest rate policy. In Asia, the Japanese yen reversed sharp overnight gains after the Bank of Japan held rates steady, following what media reports described as a significant government intervention in the currency market.

Yen Reverses After BOJ Holds Rates

The Japanese yen weakened on Friday, with the USD/JPY pair rising 0.7% to trade above the 160 level. This move erased a substantial overnight rally where the pair had fallen as much as 3% to a low of 158 yen.

Multiple media outlets attributed the yen's overnight strength to intervention by Tokyo, aimed at supporting the currency from 40-year lows. The move was reportedly coordinated with U.S. authorities, with U.S. Treasury Secretary Scott Bessent stating in an interview that the yen appeared undervalued.

However, the gains were short-lived. The Bank of Japan (BOJ) concluded its policy meeting by leaving interest rates unchanged, though it reiterated its commitment to further hikes this year. The central bank signaled that underlying inflation would likely cross its 2% target in early 2027, a message markets interpreted as a hawkish long-term signal. Analysts at Capital Economics noted they expect the BOJ's next move to be a 25 basis point hike in October.

Dollar on Pace for Monthly Decline

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The U.S. Dollar Index, which measures the greenback against a basket of major currencies, edged up 0.25% on Friday but remained on track for a 1% loss for the month of July. The monthly weakness stems largely from shifting expectations for Federal Reserve policy.

This week, the Fed held interest rates steady as expected. While three policymakers dissented in favor of a hike, comments from Fed Chair Kevin Warsh did not provide clear cues on the timing of future rate increases, leading to investor doubt.

Adding to the pressure on the dollar, the Personal Consumption Expenditures (PCE) price index for June—the Fed's preferred inflation gauge—came in softer than anticipated on Thursday. Although core prices remain above the central bank's 2% annual target, the cooling trend has diminished the perceived urgency for further monetary tightening.

Other Market Movers

In broader currency markets, several Asian currencies faced pressure. The South Korean won saw a notable reversal, with the USD/KRW pair surging 1.1% after a sharp drop on Thursday that was also reportedly caused by government intervention. The Chinese yuan also weakened after purchasing managers' index (PMI) data for July showed activity in both the manufacturing and services sectors contracted.