Japanese Yen strengthens as US Dollar falters on dovish Fed outlook

The Japanese Yen (JPY) strengthens against the US Dollar (USD) on Wednesday, with USD/JPY edging lower toward the 147.00 handle, last seen trading around 147.33. The move comes as the Greenback falls to a fresh weekly low, weighed down by growing expectations that the Federal Reserve (Fed) will begin cutting interest rates in September, with markets now pricing in two rate cuts by year-end.

Soft US macro data and cautious commentary from Fed officials have fueled renewed dovish bets, weighing on the US Dollar. The US Dollar Index (DXY), which tracks the value of the Greenback against a basket of six major currencies, slips below the lower end of its post-Nonfarm Payrolls (NFP) range, hovering around 98.40, down nearly 0.35% on the day.

Minneapolis Fed President Neel Kashkari said on Wednesday the US economy is slowing, with signs of a cooling labor market, according to remarks made on CNBC. He reiterated that two rate cuts this year still seem appropriate, adding that it may be time to begin adjusting the policy rate in the near term. Kashkari also acknowledged uncertainty around the inflationary impact of new tariffs, noting it's “still not clear” how they will feed through to price pressures. His comments add to the dovish tone from recent Fed speakers and further reinforce market expectations for a September rate cut.

According to the CME FedWatch Tool, the probability of a September rate cut has surged above 90%, while markets are also pricing in a 58% chance of a second cut in October, and around 46% by December. This reflects growing investor conviction that the Fed will begin easing policy before year-end amid signs of a cooling labor market and persistent trade-related headwinds.

Meanwhile, on the Japan side, data released earlier in the day showed that wage growth in Japan rose less than expected in June, tempering hopes of a stronger domestic demand recovery. Labor cash earnings increased by 2.5% YoY, below the 3.2% consensus forecast, though up from 1.0% in May. The figure reflects the outcome of this year’s spring labor-management negotiations but suggests that momentum may not be strong enough yet to justify immediate Bank of Japan (BoJ) tightening.

Adding to that view, a report published by BHH MarketView noted that the Bank of Japan is unlikely to raise the policy rate by more than what is currently priced in by markets, which could limit further upside in the Japanese Yen. According to the report, swaps markets imply a 65% probability of a 25 basis point rate hike by year-end, with expectations for a total of 50 basis points in tightening over the next two years, bringing the policy rate to 1.00%.