Fed Hawkishness Boosts Yen as Rate Cut Expectations Diminish

The Japanese yen gained strength against the US dollar after the Federal Reserve's decision to hold interest rates steady at 4.25%-4.50%. The USD/JPY pair fell to 149.20, down from 150.80 earlier in the week, as traders recalibrated expectations for rate cuts in 2025.

The Fed's accompanying dot plot projections revealed that committee members now expect only two quarter-point rate cuts by the end of 2025, down from four cuts projected in December 2024. This shift in expectations was seen as a hawkish tone, reducing the appeal of dollar-denominated assets and benefiting the yen.

Analysts at Tokyo-based Sumitomo Mitsui Banking Corporation noted that the yen's move reflects a recalibration of carry trade positions, with investors unwinding long dollar positions as the Fed's projections raised uncertainty about the US economic outlook.