Dollar holds two-month peak; Fed rate-hike bets mount, yen slides

The dollar held just shy of its highest level in more than two months on Thursday. Fed funds futures now price a greater than 50% chance of a rate increase by September, reversing the dovish tilt that dominated the second quarter, traders said. The repricing followed stronger-than-expected retail sales and CPI prints earlier this week. Both releases exceeded consensus estimates, upending the narrative that the economy is slowing enough for the Fed to cut rates.

Short-dated Treasury yields rose, widening the rate differential with Japan. The yen slid to 141.80 per dollar during Asian trading, down 0.3% for the session. That puts the pair within range of the 145 level that drew verbal intervention from Japanese officials earlier this year.

Traders described the dollar advance as a classic carry trade. Investors borrow yen, buy dollar assets, and pocket the yield spread. The Bank of Japan's refusal to tighten keeps the trade profitable. The BOJ meets on July 31. No change to the ultra-loose policy stance is expected. The board's quarterly outlook report will include updated inflation and growth forecasts. An upward revision to inflation without a corresponding policy shift could intensify selling pressure on the yen, traders said.

Finance Minister Shunichi Suzuki repeated Thursday that authorities are watching moves with a sense of urgency. He did not mention any specific trigger level. The Ministry of Finance has historically stepped in when the yen weakened past 145, though no intervention has occurred since late 2022.