US Dollar Plunges to Six-Month Low as BoJ Hawkishness Takes Hold

The US dollar (USD) has fallen to a six-month low against the Japanese yen (JPY), dropping around 4% in just a few days. This decline is partly due to increased expectations of a more hawkish monetary policy from the Bank of Japan (BoJ). Traders are unwinding their short yen positions, a strategy known as the carry trade, as they anticipate higher interest rates.

The yen has gained strength thanks to the BoJ's support, with Japanese authorities spending a record $96.5 billion on supporting the currency between July 30 and August 26. The market is pricing in a 98% probability of a 25-basis-point rate hike next week to 1.25%, followed by another 25-basis-point increase in January, taking the rate to 1.5%. This hawkish stance has contributed to the yen's rally.

The US dollar's weakness is also attributed to the recent nonfarm payrolls data, which showed a better-than-expected rise of 162,000 jobs. However, this hasn't translated into support for the greenback, and it remains at two-week lows against the yen.