Yen Under Pressure as Traders Bet on BOJ Lagging Global Hawkish Shift

The yen is under pressure as traders bet that Japan's central bank will struggle to keep pace with global hawkish monetary policy shifts, leaving its interest rates far behind major peers. The Bank of Japan (BOJ) last week raised its benchmark short-term rate by 50 basis points, but two of the nine members of the board dissented, casting doubt on whether the BOJ will continue to tighten policy in line with the Federal Reserve.

With the Federal Reserve hiking rates and other major central banks sounding hawkish, markets are pricing a significant chance that the BOJ will soon follow suit. Carlos Casanova, senior Asia economist at Union Bancaire Privée, notes that 'unless the BOJ tightens policy more rapidly than the Federal Reserve, the approximately 275-basis-point US-Japan rate differential should continue to support yen-funded carry trades.'

Markets are currently pricing around a 30% chance of a BOJ interest rate hike to 1.5% in October and a roughly 55% chance that the Fed will lift its funds rate window by 25 basis points to 4% to 4.25%. The Reserve Bank of Australia Governor Michele Bullock also weighed in, warning of upside risks to inflation due to persistent high energy prices.

The Aussie dollar remained steady at $0.7120, while the New Zealand dollar got a boost from Reserve Bank of New Zealand Governor Anna Breman's hawkish comments. If recent gains in oil prices persist, it would lead to somewhat higher inflation than previously forecast, she said. The kiwi rose about 0.4% to $0.5736.

Cryptocurrencies eased slightly after a strong rally on Monday, with Bitcoin down around 2% from its 8-month high above $87,000.