Yen Weakens as Dollar Gains on Widening US-Japan Rate Gap

The Japanese yen remained under pressure against a firm U.S. dollar on Tuesday as traders focused on the widening interest rate gap between Japan and other major economies following a hawkish shift among global central banks.

The yen traded around 157.33 per dollar in early trading, although moves were limited by a Japanese market holiday and concerns that authorities could intervene in the foreign exchange market. The Nikkei reported that Japan conducted a dollar-yen rate check on Friday, a step sometimes viewed as a warning before possible currency intervention.

Pressure on the yen has persisted since the Bank of Japan raised interest rates on Friday. Two dovish dissents accompanying the decision tempered expectations for aggressive tightening, contrasting with the Federal Reserve and other central banks signaling that further rate increases may be necessary.

Carlos Casanova, senior Asia economist at Union Bancaire Privée, said the roughly 275-basis-point U.S.-Japan interest rate differential should continue supporting yen-funded carry trades unless the BOJ tightens policy faster than the Fed. He expects USD/JPY to reach 160 by year-end before easing toward 156 by mid-2027.

Markets currently see about a 30% probability that the BOJ will raise its benchmark short-term rate to 1.5% in October. Traders are also pricing roughly a 55% chance that the Federal Reserve will increase its target range by another 25 basis points to 4%-4.25%.

Elsewhere, the euro held near $1.1467 and sterling traded around $1.3372. The Australian dollar hovered at $0.7120 ahead of remarks from Reserve Bank of Australia Governor Michele Bullock, with markets assigning a 90% probability to another Australian rate hike next week.

The New Zealand dollar remained near multi-month lows at $0.5708 as its comparatively lower interest rates weighed on the currency. Meanwhile, bitcoin climbed above $87,000, reaching an eight-month high as cryptocurrencies extended their recent rally.