Yen Falls as Traders Bet on Japan's Lagging Interest Rates

The yen came under pressure on Tuesday as traders bet that Japan's central bank will struggle to keep up with other global policymakers' hawkish turns. This leaves Japan's interest rates at a significant gap with its major peers.

The Bank of Japan (BOJ) last week hiked its benchmark rate, but two dissents suggested the BOJ may not be as dovish as its recent actions. The Federal Reserve, on the other hand, also raised rates and signaled further increases this year.

This contrast has led to a widening gap in interest rates between the US and Japan, supporting yen-funded carry trades. Markets price about 30% chance of another BOJ rate hike in October and around 55% for a 25-basis-point increase by the Federal Reserve.

Other central banks are also sounding hawkish, with Reserve Bank of Australia Governor Michele Bullock warning of upside inflation risks due to high energy prices. This has led to predictions of rate hikes as soon as next week in Australia and New Zealand.