The yen has been one of the worst-performing major currencies in the world for most of this year, falling nearly 5% against the dollar and against the euro (1.1212, 0.0012, 0.11%), British pound (1.2915, -0.0023, -0.18%) and The Swiss franc fell even more. But the yen has reversed course sharply in the past two weeks, gaining more than 4% against the dollar since early July.
The rapid move in the yen-dollar exchange rate is part of a larger trend of dollar weakness. The U.S. consumer price index (CPI) cooled last month, reinforcing views that the Federal Reserve will wrap up raising interest rates after its meeting next week. Most economists expect the Fed to eventually raise rates at least once at its meeting next week.
The depreciation of the dollar against the yen (139.42, -0.1800, -0.13%) this month has been more pronounced than that of other currencies. That’s partly because the yen has fallen sharply against the dollar amid a Fed rate hike cycle, but also because traders are increasingly expecting the Bank of Japan to do its part in bridging the interest rate gap between the two countries.
“Policy convergence between the U.S. and Japan could be much faster than first thought,” said Tetsufumi Yamakawa, chief Japan economist at Barclays.
According to some surveys, nearly three-quarters of market participants expect the Bank of Japan to keep policy unchanged at its next meeting. But if the BOJ does change policy, 45% expect the BOJ to remove yield curve control entirely.
