Dollar declines, yen strengthens on expectations of a BOJ rate hike

The US dollar weakened on Tuesday, while the Japanese yen strengthened sharply. Investors are increasingly anticipating that the Bank of Japan may raise interest rates in the near term. At the same time, markets are awaiting key US inflation data.

The yen gained 0.2% against the dollar, climbing to 154 in early trading — its strongest level since February. The dollar index, which measures the US currency against six major currencies, fell 0.3% to 98.81.

The yen's strength is also being supported by investors unwinding so-called carry trade positions. This strategy involves borrowing in low-interest-rate yen and investing the proceeds in higher-yielding assets. Expectations of rising Japanese rates make this strategy less attractive, prompting investors to buy yen.

The market is currently paying particularly close attention to the direction of BOJ policy. Japan's central bank kept its rate at 1% in July, but pointed to inflation risks. Market participants now increasingly expect an additional 25 basis point hike in September.

Meanwhile, upcoming US inflation data will be important for the dollar's future direction. Higher inflation could push the Federal Reserve to keep rates higher for longer, providing the dollar with some support. Weak data, on the other hand, could reinforce the yen's current rally and the dollar's downward trend.

European currencies were relatively stable: the euro traded around $1.1610, while the pound moved around $1.3520.