Dollar Reigns as Hawkish Central Banks Force Yen's Weak Hand

The yen is under pressure from a firm dollar as traders bet on Japan's policymakers struggling to keep up with a hawkish turn by global central banks. The country's interest rates are at a wide gap with major peers.

The yen traded at 157.33 versus the dollar early on Tuesday, while broader financial markets were buoyed by falling oil prices. Other currency pairs were mostly steady, with the euro at $1.1467.

Crypto assets have rallied in the past day to lift Bitcoin to an eight-month high above $87,000. Carlos Casanova, senior Asia economist at Union Bancaire Privée, said 'Unless the BOJ tightens policy more rapidly than the Federal Reserve, the approximately 275-basis-point US-Japan rate differential should continue to support yen-funded carry trades.'

The market is pricing a 30% chance that the BOJ hikes its benchmark short-term rate to 1.5% in October and a roughly 55% chance that the Fed will lift its funds rate window by 25 basis points to 4% to 4.25%. The Reserve Bank of Australia Governor Michele Bullock is likely to strike a hawkish tone at a fireside chat scheduled later on Tuesday.

The Aussie dollar hovered at $0.7120, while the New Zealand dollar was pinned near multi-month lows at $0.5708 due to kiwi rates sitting at 2.75%, much lower than peers. ANZ analysts said 'Kiwi price action looks weak as higher-yielding currencies benefit from better carry.'