The US Dollar Index posts modest gains around 100.30 on Friday as traders continue to assess the latest Federal Reserve rate hike and policy cues. On Wednesday, the US central bank opted to increase its benchmark interest rate by a quarter-percentage point, bringing it to a range of 3.75% to 4.00%. This marks the initial occasion on which the Federal Reserve has increased interest rates since July 2023. Fed Governor Michelle Bowman is scheduled to deliver a speech later on Friday. Markets are currently assigning a probability of approximately 53.1% to the likelihood of an additional US rate hike during the Federal Reserve’s upcoming meeting in October, a notable increase from the nearly 44% observed just a day prior, as indicated by the CME FedWatch tool. Market participants are closely monitoring the evolving situation in the Middle East. On Thursday, Iran’s Islamic Revolutionary Guard Corps reported that a Togo-flagged oil tanker was hit while attempting to make a “illegal passage” through the Strait of Hormuz. The Iranian military asserted its continued control over the critical waterway, emphasising that it will not permit the passage of any aggressor.
US President Donald Trump indicated on Thursday that he is nearing a significant decision regarding the potential resumption of large-scale military operations against Iran, as Washington contemplates strategies to conclude the protracted conflict, according to source. As widely anticipated, the Bank of Japan increased its policy rate by 25 basis points to 1.25% from 1.00%, marking the highest level since 1995. The decision was divided 7-2, with board members Toichiro Asada and Ayano Sato expressing dissent regarding the increase. The Bank of Japan indicated a potential risk that underlying inflation may exceed its 2% target. Strategists warn that Asia FX could come under renewed pressure as markets “repric[e] for further Fed hikes,” a shift they believe “may spur portfolio outflows from the region, putting the year-to-date rebound in Asia Dollar Index in jeopardy.” They note that the US Treasury buyback programme “was a surprise Asia FX tailwind in Aug, reviving the USD debasement trade,” but judge that “its impact is likely now secondary to Fed’s hawkish tilt,” leaving regional currencies more vulnerable to sustained US rate strength.
The 8.2/10 FXS Speechtracker score aligns precisely with the speaker’s historical average; however, the language exhibits a distinct hawkish inclination as the BoJ indicates that underlying inflation is nearing 2% and may exceed that threshold. Repeated emphasis on moderately rising CPI, heightening inflation expectations, and cost pass-through from wages, alongside the acknowledgement that recent Yen depreciation is likely to lift prices, underpins a shift toward reducing monetary support even while financial conditions remain accommodative. The commitment to ‘continue to raise interest rates’ and to adjust the degree of monetary support to sustainably achieve the price target, combined with vigilance over Middle East risks, AI-related demand and FX volatility, reinforces a tightening bias that is supportive of the Yen. Dissent from board members Asada and Sato on the rate decision underscores an internal debate regarding the pace of normalisation.
However, the baseline scenario of a moderately recovering economy and inflation stabilising around 2% maintains a decidedly hawkish outlook for JPY. The EUR/USD maintains a favourable position close to 1.1485 during the European morning session. The European Central Bank raised its key deposit rate by 25 basis points to 2.50% last week. Economists indicate that the ECB is likely to postpone any final interest-rate increase until December, aiming to address inflation concerns exacerbated by the ongoing conflict in the Middle East. GBP/USD has strengthened above 1.3350, breaking a four-day decline on Thursday. The Bank of England maintained the Bank Rate at 3.75% on Thursday, yet cautioned that an increase was becoming more probable. USD/JPY has surged past 157.00 during the European trading session on Friday. The BoJ has opted to increase its policy rate by 25 basis points to 1.25%, marking the highest level since 1995.
