Both the Federal Reserve and the Bank of Japan have turned hawkish, and on paper that should be supporting the Yen. Instead, the Yen keeps falling, having now hit a 40-year low, whilst equity markets continue their march up.
When a Rate Hike Isn't Enough
The Bank of Japan lifted its policy rate to 1% earlier this month, the highest since 1995, and board members have shared a target near 2%. Technically, that should always push the Yen up higher; however, the Federal Reserve, under new chair Kevin Warsh, has dropped its bias toward cuts and now signals its next move as a hike. That leaves the gap between US and Japanese yields wide enough to keep the carry trade alive, whose flow is still dragging the Yen lower. Tokyo has spent heavily defending the currency over the past two months, yet the slide resumes each time, making us wonder where the BoJ has been beaten.
The Relief Rally Finds Its Feet
Equities, meanwhile, are repairing the damage. Wall Street rebounded into quarter-end as markets are still trying to figure out whether the AI Capex will produce the necessary results or not. Part of the strength likely reflects quarter-end rebalancing rather than a clean verdict that the AI washout is over, arguing the case that there is more underlying weakness than anticipated.
Oil's War Premium, Fully Drained
The commodity that defined the first half of the year has gone quiet. Crude has fallen back to levels last seen before the Iran conflict began; the disruption premium that once carried Brent toward record territory is now gone as Gulf supply returns. A renewed exchange of fire near the Strait of Hormuz over the weekend put a modest bid back under prices, with talks due in Doha, but the market is treating the flare-ups as noise, not a return of the conflict. The wider consequence matters more than the price: with energy no longer pushing inflation higher, the case for further rate hikes in Europe has softened, even as the Federal Reserve holds its line, caused by core inflation continuing its push up.
The through-line is a dollar that nothing in the current mix can easily dislodge. The next test arrives on Thursday with the US jobs report, brought forward for the holiday. A soft print would hand Tokyo the weak-dollar momentum it has lacked and could finally intervene; a strong one would push the Yen deeper into uncharted territory and lift the odds of a September hike. With the Bank of Japan's decision due at the end of July and the Iran talks unresolved, any of these could reshape the picture quickly. A sudden move could abruptly end the Yen carry trade, causing an aggressive bid in the currency.