$Yen Sinks as Warsh Warns of Another Rate Hike
The US dollar has steadied near a two-week high after former Fed governor Kevin Warsh signaled that the central bank may need to tighten policy again due to inflation concerns. This has lifted the odds of a September rate hike to 57% and pushed the yen back past 160 per dollar.
Warsh stated that if the Fed cannot get comfortable with inflation returning to 2%, they will 'have work to do', implying that higher interest rates are still on the table. This has led traders to bid up short-term US government bonds, causing the two-year Treasury yield to rise to 4.33%.
The wider gap between US and Japanese interest rates is making it more attractive for investors to hold dollars over yen, putting downward pressure on Japan's currency. Analysts at Swiss bank UBP warned that even when Japan intervenes to push the yen higher, the effect often fades unless the rate backdrop shifts in favor of the yen.