The Yen was boosted by intervention

The US dollar recorded its worst two-day performance since January amid a market reassessment of the Fed’s ability to bring inflation back to target, hawkish rhetoric from the Bank of England, and currency intervention by Japan. Investors continue to digest the outcome of the July FOMC meeting and are concluding that Kevin Warsh is hardly a hawk. He seeks to shift the burden of curbing inflation onto financial markets, a move that risks prolonging the pause and weakening the greenback.

The likelihood of the Fed tightening monetary policy in September continues to fall, and a decline in US Treasury yields is dragging the dollar down. Qatar estimates Strait of Hormuz traffic at 6.5 million barrels per day, a gradual increase, while Pakistan claims there is ongoing dialogue between the US and Iran. The stabilisation of oil prices and the rise in stock market indices are putting pressure on the greenback as a safe-haven asset.

However, the main blow to the US dollar came from its rivals. For the first time since the fourth quarter of 2025, the eurozone economy grew faster than US GDP in April–June. This increased the likelihood of an ECB rate rise and supported the euro. The Bank of England kept borrowing costs unchanged. However, Andrew Bailey stated that the BoE would be forced to tighten monetary policy if the conflict in the Middle East continues.

The Japanese government capitalised on investors’ doubts about Warsh’s hawkish stance and intervened in the foreign exchange market. The decline in USDJPY was the sharpest in two years. At the same time, Tokyo hinted that it had received more than moral support from Washington. The coordinated intervention showed speculators how dangerous it is to bet against the authorities.

The sharp appreciation of the yen allowed the Bank of Japan to avoid rushing into action. It kept the overnight rate at 1% and raised its GDP forecast for 2026 from 0.5% to 0.6%. Inflation is expected to stand at 2.5%, rather than the previously forecast 2.8%. The absence of any hints of an acceleration in the cycle of monetary tightening allowed the USDJPY bulls to lick their wounds. Meanwhile, US Treasury Secretary Scott Bessent called on the BoJ to further tighten monetary policy. 

Summary: The dollar weakened as doubts about the Fed, Japan’s intervention, and stronger rivals weighed on sentiment, while USDJPY suffered a sharp decline.