USD/JPY Rebounds on Rising Treasury Yields, DAX Suffers Bond Rout

The USD/JPY exchange rate has been on an upward trajectory as of late, recovering from its seven-month low. This rebound is largely attributed to the rise in U.S. Treasury yields, which have surpassed 5% for the first time since 2007.

The market's expectations for a 25-basis-point interest rate hike by the Federal Reserve on Wednesday are also contributing to the dollar's strength. According to CME FedWatch, there is an 92% probability of this outcome, taking rates to 3.75%-4%. Additionally, markets are pricing in a 53% chance of another hike at the October meeting.

The Japanese yen has pulled back as markets look ahead to the BOJ rate decision on Friday, where the central bank is expected to raise rates by 25 basis points. The key focus will be on how strongly it signals further tightening, with policymakers at the BOJ anticipated to maintain a faster pace of increases.