Japanese yen at 2-month lows vs. USD 

On Wednesday, the Japanese yen reached a new multi-month low against the dollar, following a landmark decision by the Bank of Japan (BoJ) to increase interest rates for the first time in nearly two decades on Tuesday. 

Experts highlight that the wide gap between the yields on U.S. Treasuries and Japanese government bonds continues to exert downward pressure on the yen, which is approaching its multi-decade low of 151.94, recorded in October 2022. The dollar notably rose to 151.92 by last November. 

Major central banks, such as the Federal Reserve (Fed), Bank of England (BoE), and European Central Bank (ECB) are largely moving in lockstep as they plan to cut interest rates to stimulate economic growth amid slowing economies and declining inflation. 

Bipan Rai, North America head of FX strategy at CIBC Capital Markets in Toronto, commented on the recent dynamics to Reuters: 

"Nobody's expecting the BOJ to embark on a prolonged hiking cycle. You're still going to end up in a scenario where the rate differentials between the United States and Japan are going to look fairly wide." 

The U.S. dollar was a 0.51% up against the Japanese yen, with the USD to JPY currency pair trading around 151.63 at the time of writing on March 20. 

Fed meeting poses additional risks to JPY, may lead to intervention 

The upcoming Federal Reserve Open Market Committee (FOMC) meeting is anticipated to pose additional risks to the Japanese yen's value, potentially prompting Japanese authorities to intervene to bolster the currency. 

Investors are largely expecting the U.S. central bank to maintain current interest rates unchanged during its policy announcement, but there is speculation that Fed Chair Jerome Powell's statement and remarks might have a hawkish lean on future monetary policy adjustments. 

Following the BoJ's announcement to end its prolonged period of ultra-loose monetary policies, the yen weakened significantly, leading to a decrease in Japanese government bond yields.  

Athanasios Vamvakidis, global head of forex research at BofA, told Reuters: 

"If the yen falls further from the current levels, I expect some verbal intervention from Japanese authorities to support the currency. The BoJ decided for a dovish exit from its negative rates policy. They raised rates but for now they are staying there. Meanwhile they will continue buying the same amount of bonds.” 

This drop spanned various currencies, with the yen dropping to 164.71 against the euro, its lowest since 2008. Against the pound, the yen dropped to its lowest level since 2015, with GBP to JPY trading at 192.84. 

The yen's status as a preferred currency for carry trades has been attributed to Japan's low interest rates, enabling traders to borrow at low costs to invest in higher-yielding assets elsewhere. 

Dollar index sees modest rise, euro and Aussie dip 

The U.S. dollar index (DXY), a measure of the greenback's strength against six other currencies, saw an increase of 0.58% to 104.04. Recent stronger-than-expected U.S. inflation data has led traders to reduce bets for Federal Reserve rate cuts this year, with the market now forecasting less monetary easing — 74 basis points (bps) of cuts by year end, or about half expectations at the start of 2024. 

The euro and the Australian dollar also saw declines, with investors cautiously positioning themselves ahead of the Fed meeting. On Wednesday, European Central Bank President Christine Lagarde reiterated that the bank will be data-dependent in its monetary policy decisions and will not commit to a pre-determined number of rate cuts after it starts to lower borrowing costs. 

The euro was down 0.17%, with EUR/USD at $1.0850 ahead of the Fed meeting. 

The Aussie eased 0.08% to $0.6526, a day after the Australian central bank held interest rates steady as expected.