The US dollar gained against all its major peers yesterday and extended these gains on Friday against most currencies, with the exception of the Japanese yen, which strengthened after a Bank of Japan decision that turned out to be more hawkish than expected.
The dollar rebounded following Wednesday’s Federal Reserve decision, which investors judged to be less dovish than anticipated. The FOMC cut interest rates by 25 basis points, but Fed Chair Jerome Powell appeared in no rush to ease borrowing costs aggressively during his press conference. The committee’s projections showed two more cuts this year, but the median forecast for 2026 pointed to just one additional cut—contrasting with market expectations for three.
Adding further momentum to the dollar’s rise yesterday was a larger-than-expected drop in weekly initial jobless claims. Despite recent signs of weakness in labor reports, the Fed upgraded its growth forecasts and projected the unemployment rate would fall across its forecast horizon. The claims data reinforced that optimism.
Nevertheless, even with additional gains in the greenback, Fed funds futures indicate that investors remain convinced of two further cuts this year—in October and December—and three more in 2026. This divergence between market and Fed expectations suggests the dollar’s path will remain uncertain in the near term.
If incoming data continue to point to a stronger labor market, investors may start trimming bets on aggressive easing, which could lend the dollar further support. Conversely, weaker labor data could shift sentiment in the opposite direction.
Sterling Retreats as Two BOE Members Vote for a Cut
Thursday saw the Bank of England’s latest policy decision, with policymakers opting to hold rates steady by a 7–2 vote while reducing the pace of gilt sales to £70 billion from £100 billion.
Sterling’s initial reaction was positive, likely due to the relatively hawkish tone in the statement, which reaffirmed that a gradual and cautious approach to unwinding monetary accommodation remained appropriate. The statement also noted that the overall degree of policy tightness had fallen, hinting that the need for further cuts was not pressing.
However, the pound quickly reversed and lost its gains, pressured by the surprise of two members voting for a 25-basis-point cut instead of just one as expected. The stronger dollar on the back of US jobless claims, combined with comments from Governor Andrew Bailey later in the day pointing to the likelihood of further easing ahead, added to sterling’s decline.
Yen Rallies After a Hawkish BOJ Tone
During today’s Asian session, focus turned to the Bank of Japan. Policymakers also kept rates unchanged in a 7–2 vote, but this time the dissenters pushed for a hike. The BOJ also unanimously announced it would begin selling its holdings of exchange-traded funds (ETFs) and Japanese real estate investment trusts (J-REITs).
The yen jumped immediately as traders ramped up bets on a rate increase. According to Japan’s overnight index swaps (OIS), the probability of a 25-basis-point hike by year-end rose to 70% from 65% prior to the decision. Markets are pricing a 43% chance of an October hike, with expectations of another similar move next year.
