Yen Strengthens on BOJ Rate Hike Bets as Dollar Rally Pauses After Fed Decision

The U.S. dollar pulled back slightly from a seven-week high on Thursday as currency traders shifted their focus to upcoming policy decisions from the Bank of Japan and Bank of England following a hawkish signal from the Federal Reserve.

Dollar Consolidates After Fed Hike

The U.S. Dollar Index (DXY), which measures the greenback against a basket of six major currencies, was little changed near 100.17. This pause follows a 0.7% gain in the previous session after the Federal Reserve delivered its first interest rate increase in three years.

The Fed voted unanimously to raise the benchmark federal funds rate by 25 basis points to a target range of 3.75%-4.00%. According to the source, Fed Chair Kevin Warsh's firm stance on combating inflation bolstered market confidence. Interest rate futures now indicate a nearly 90% probability of another 25-basis-point hike before the end of the year.

Yen Leads Gains on BOJ Tightening Bets

The Japanese yen was the day's standout performer among major currencies, rising 0.3% against the dollar. The move was driven by strong market expectations for a landmark policy shift by the Bank of Japan (BOJ).

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Money markets have almost fully priced in a 25-basis-point rate hike to 1.25% at the BOJ's meeting on Friday. If implemented, this would lift Japan's borrowing costs to their highest level in 31 years, signaling a decisive end to decades of ultra-loose monetary policy under Governor Kazuo Ueda. The yen is also finding support from expectations of capital repatriation by Japanese institutional investors and continued market vigilance over potential coordinated currency intervention.

Sterling Steady Ahead of Bank of England Decision

Elsewhere, the British pound held steady near a six-week low around $1.3400 as investors awaited the Bank of England's (BoE) policy announcement later on Thursday. The central bank is widely expected to keep its key interest rate unchanged.

Markets are closely watching for forward guidance from BoE Governor Andrew Bailey. With UK consumer price inflation remaining above 3% and energy costs elevated, investors will be searching for any signals that the BoE might follow the Fed and the European Central Bank—which recently raised its marginal rate to 2.50%—with a rate hike in the autumn.