Japanese Yen Retreats as Dollar Rises Ahead of Fed, BOJ Rate Decisions

The Japanese yen weakened further on Tuesday, retreating from a seven-month high as investors prepared for key interest rate decisions from the Federal Reserve and Bank of Japan later this week.

USD/JPY climbed 0.24% to around 154.70, pushing the yen further from last week's seven-month peak of 152.89. Despite the pullback, expectations for tighter Japanese monetary policy continued to provide underlying support for the currency.

Markets widely expect the BOJ to raise interest rates by 25 basis points on Friday. With the move largely priced in, traders are focusing on guidance from policymakers about the timing and pace of additional rate hikes. The yen had gained roughly 4% this month before its latest decline.

Meanwhile, the U.S. dollar index advanced 0.12% to approximately 99.60, approaching a two-week high as rising oil prices and Treasury yields reinforced expectations for tighter Federal Reserve policy. EUR/USD declined 0.11% to 1.1537, while GBP/USD fell 0.12% to 1.3485.

Markets are pricing about a 93% probability that the Fed will raise rates on Wednesday, which would mark its first increase in more than three years. However, DBS cautioned against chasing the dollar higher before the FOMC decision, noting that much of the expected tightening cycle is already reflected in market pricing and that a rate hold remains possible.

Surging crude oil prices have also boosted inflation concerns and pressured currencies in energy-importing economies. The South Korean won weakened as USD/KRW rose 0.6% to 1,354.84, while USD/INR, USD/SGD and USD/MYR also moved higher.

Indonesia's rupiah remained under pressure, with USD/IDR gaining 0.2% to 17,682.5 following President Prabowo Subianto's decision to replace Finance Minister Purbaya Yudhi Sadewa with Vice Finance Minister Suahasil Nazara. DBS expects USD/IDR to remain within a 17,600-17,800 range as elevated U.S. yields and a stronger dollar shape regional currency markets.