Dollar Slumps as Japan-US Intervention Packs Punch

The US dollar (USD) fell against major currencies last week, with the Japanese yen (JPY) leading the pack. The decline was attributed to a combination of factors, including market concerns over the Federal Reserve's (Fed) inflation-fighting credibility and suspected joint intervention by Japan and the US to strengthen the JPY.

A coordinated FX intervention is underway, with the US Treasury buying $5-10 billion worth of Japanese yen on Friday. According to historical data, all three coordinated US FX intervention episodes were successful since 1998, resulting in significant gains for the USD/JPY exchange rate.

This week's US jobs reports are expected to take a backseat to July ISM prices paid surveys, which will provide clues on whether inflation has peaked or remains a concern. A softer price index could pull Fed funds rate expectations lower, while rising price pressures would revive concerns over the Fed's ability to contain inflation risks.

The Reserve Bank of India (RBI) is expected to keep its policy rate at 5.25%, while the Banco Central do Bazil (BCB) will likely deliver a fourth straight 25bps cut to 14.00%. The Bank of Canada (BOC) is well-positioned to maintain its policy rate at 2.25% for an extended period, with underlying inflation running below its 2% target.