Dollar Retreat Continues as Sanctions Relief and Fed Policy Loom
The US dollar's retreat against major currencies continues due to easing geopolitical risks and the return of the 'sell America' trade. This trend is further fueled by a Wall Street Journal report that claims Donald Trump is in regular contact with Kevin Warsh, which may indicate the new Fed chair will be influenced by the White House.
This development has sparked concerns about the dollar's future prospects, particularly if the Fed tightens monetary policy. The lifting of sanctions on Oman and Iran could lead to an increase in oil supply, resulting in lower prices and reduced inflation risks. This, in turn, may prevent the Fed from raising interest rates, allowing other currencies to strengthen against the greenback.
The Bank of Japan's response will be crucial in determining the yen's fate. According to Bank of America, USDJPY is expected to plummet to 149 by the end of the year if the BoJ accelerates monetary policy tightening. However, CBA forecasts a rally in USDJPY to 165 by the second quarter of 2027, assuming the Fed tightens policy three or four times starting in December.
A resurgence in carry trades could also impact the yen's value. As the Bloomberg EM FX Carry Risk Premia Index fell approximately 1% due to coordinated currency intervention, carry traders are gradually returning to selling the yen as a funding currency.