Dollar Plunges Amid Fed Reassessment and Japanese Intervention

The US dollar has been in free fall over the past two days, suffering its worst performance since January.

The main culprit behind this decline is the market's reassessment of the Federal Reserve's ability to curb inflation, as well as hawkish rhetoric from the Bank of England and currency intervention by Japan.

US Treasury Secretary Scott Bessent called on the Bank of Japan to further tighten monetary policy, but Tokyo has instead taken a more measured approach, intervening in the foreign exchange market and allowing the yen to appreciate sharply against the dollar.

The decline in USDJPY was the sharpest in two years, with investors concluding that Kevin Warsh's stance on inflation is not as hawkish as previously thought. The absence of any hints of an acceleration in the cycle of monetary tightening has allowed the Bank of Japan to avoid rushing into action, and its GDP forecast for 2026 has been raised from 0.5% to 0.6%, with inflation expected to stand at 2.5% rather than the previously forecast 2.8%.