- USDJPY touched the 160 level for the first time in a month.
- Hawkish remarks from former Federal Reserve official Kevin Warsh provided a lift to the US dollar.
The US dollar surged after Kevin Warsh reiterated a hawkish stance, gaining ground against the major currencies. Despite a recent deceleration in inflation, Warsh argued that the current policy stance remains insufficiently restrictive and that the central bank must continue its tightening efforts. His comments lifted Treasury yields, weighed on equity markets, and propelled the dollar higher.
Futures markets now price a 60% chance of a Federal Reserve rate increase in September, up from 38% before Warsh’s Jackson Hole address. CME derivatives also indicate a 49% probability of two rate hikes in 2026, compared with 21% prior to his speech.
Meanwhile, escalating tensions in the Middle East continue to push economic indicators higher. The United States carried out its first strikes on Iran since late July, prompting retaliatory attacks on US installations in Jordan. The resulting spike in Brent crude above $90 per barrel raises the risk of renewed inflationary pressure, potentially prompting the Fed to adopt a more aggressive monetary tightening stance.
The dollar’s strength allowed USDJPY bulls to drive the pair beyond the key 160 level. Although the rate slipped on its initial attempt, speculators have been building short yen positions for the second consecutive week, suggesting additional upward pressure may follow. Earlier currency intervention had partially offset losses, with a record $98.7 billion intervention total.
Treasury Secretary Scott Bessent addressed Congress regarding Washington’s role in the coordinated forex intervention. He noted that Japan holds the largest share of US Treasuries and that erratic yen movements could destabilize financial markets and raise borrowing costs in the United States.
Bessent indicated that the US will not dictate policy to the Bank of Japan but expects the Bank to fully grasp the situation. Japan, he suggested, has exhausted the reflationary approach pioneered by Abenomics, signalling a likely shift toward higher overnight rates at the BoJ’s September meeting. Futures markets now assign an 80% probability to further monetary tightening, without which currency interventions would be ineffective.
