Key Highlights

  • The dollar index slipped to around 99.5 on Thursday, extending losses from the previous session, as a sharp yen rally weighed on the greenback.
  • Speculation mounted that Japanese authorities had conducted a rate check and could intervene again to support the yen, following a similarly rapid move earlier in the week.
  • A senior Federal Reserve official said there is evidence Inflation continues to ease as Tariff impacts fade, even as markets price in roughly a two-thirds chance of a rate hike this month.
  • Oil prices halted their recent rally after Trump said the latest attacks on Iran would be short-lived, easing inflation concerns and reducing safe-haven Demand for the dollar.

A Weaker Dollar as the Yen Extends Its Advance

The dollar index slipped to around 99.5 on Thursday, extending losses from the previous session, as a sharp rally in the yen weighed on the greenback amid speculation that Japanese authorities had conducted a rate check and could intervene again to support their currency. The move followed a similarly rapid decline in the dollar-yen pair earlier in the week, a pace of movement that Market Participants said resembled the pattern seen during prior rounds of currency intervention, even though no official confirmation of intervention or a rate check has been provided by Japanese authorities.

A rate check involves a government or Central Bank asking financial institutions to quote an Exchange Rate without actually buying or selling currency, a step sometimes taken as a precursor to intervention or as a signal intended to influence market expectations on its own. The yen's advance has been further supported by hawkish signals from Bank of Japan officials, including comments this week suggesting the central bank should move nimbly to raise rates in response to intensifying inflationary pressure rather than sticking to a fixed timetable.

Fed Commentary Points to Easing Inflation Pressure

In the US, New York Fed President John Williams said there is evidence that inflation continues to ease as the impact of tariffs fades, though he noted that higher energy prices have yet to fully spill over into broader services inflation. His comments came a day after data showed that US private-sector employment growth slowed in August, adding to signs of a cooling labor market even as inflation risks tied to the Middle East conflict remain elevated.

Despite the softer tone from Williams and the weaker private payrolls figure, markets are still pricing in roughly a two-thirds probability of a Federal Reserve Interest Rate hike later this month, reflecting the lingering influence of hawkish remarks from Fed Chair Kevin Warsh at last week's Jackson Hole symposium. Investors now look ahead to weekly jobless claims data on Thursday, followed by Friday's closely watched August payrolls report, for further guidance on the health of the labor market and its implications for the Fed's next move.

Oil's Pause Removes a Key Prop for the Dollar

Elsewhere, oil prices halted their recent rally after Trump said the latest attacks on Iran would be short-lived, a comment that helped ease inflation concerns tied to the ongoing conflict and reduced safe-haven demand for the dollar. The stalling of the oil rally removed one of the key forces that had been supporting the greenback in recent sessions, compounding the pressure from the yen's rapid appreciation and contributing to the broader pullback in the dollar index.

A Currency Market Caught Between Competing Signals

Thursday's moves illustrate how currency markets are currently balancing several cross-currents at once: shifting expectations for Bank of Japan policy and possible intervention, mixed signals on US inflation and labor market health, and the on-again, off-again risk premium tied to the Middle East conflict. With Friday's payrolls report looming as the next major catalyst, the dollar's near-term direction will likely hinge on whether incoming US data reinforces or challenges the market's current two-thirds pricing of a September rate hike, even as developments in Tokyo continue to add an unpredictable layer to currency positioning.