Global FX: Dollar down after FOMC, MoF intervention
The FX desk interprets the recent downturn in the dollar as a distinct response to the Federal Open Market Committee's (FOMC) latest policy signals, compounded by Japan's latest intervention against a backdrop of stagnant Bank of Japan (BoJ) rates. Per the full note from J.P. Morgan, the dollar's weakness followed signals of a prolonged dovish stance from the Federal Reserve, which is seen as a departure from any potential tightening. This dovish pivot, in conjunction with Japan’s continued FX intervention, has created a confluence of factors driving a bearish sentiment around the dollar, particularly against major currencies like the AUD and GBP. As the situation unfolds, traders should monitor the evolving central bank narratives closely for further indications of policy direction.
What the desk is arguing
The desk posits that the recent FOMC meeting has marked a turning point for the dollar, whose decline is attributed to the central bank's ongoing dovish posture and the intervention measures from the Ministry of Finance in Japan. According to J.P. Morgan's analysis, the FOMC has indicated a potentially extended period of lower interest rates, engendering a bearish outlook on the dollar.
Coinciding with the dollar's slide, Japan's Ministry of Finance has implemented additional currency market interventions, highlighting ongoing concerns about yen stability amid a persistent hold by the BoJ on its monetary policy. This intervention suggests that while the dollar may be losing ground, there is active engagement from Japan to stabilize its currency.
The alternative read would be that any unexpected hawkish commentary from the Fed could quickly shift market sentiment, leading to a rebound in the dollar's strength, especially if inflationary pressures resurface significantly enough to compel a policy response.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Post-FOMC weakness in the dollar reflects dovish Fed signals.
- 02Japan's intervention highlights ongoing concerns about yen stability.
- 03Continued dovish policy may lead to extended dollar weakness against AUD and GBP.
Market implications
Traders should closely observe the EUR/USD for potential further declines as the euro area grapples with differing monetary conditions compared to the US. The ongoing dynamics of USD/JPY will also be critical alongside any developments in Japan's currency interventions, particularly as market sentiment shifts.
Risks to this view
The primary risk to this bearish dollar outlook stems from a shift in Federal Reserve policy direction—if inflation indicators accelerate, the possibility of faster-than-expected rate hikes could reverse current trends. Additionally, if Japan's economic indicators begin to strengthen, reducing intervention necessity, the dollar could regain traction against the yen.
Hello, and welcome to this week's At Any Rate podcast. My name is Pat Locke, FX strategist based out of New York here at J.P. Morgan, joined this week by my colleagues, Junya Tanase of Tokyo, Ben Jarman out of Sydney, and Clinchpad next to me here in New York.
Pretty big, significant week, feels like, for the FX space. Dollar's gotten hit pretty hard by the combination of the FOMC outcome and then the MOF stepping in and pouring some gasoline on it as well will break all that down this week. I guess, you know, from my side, just to kick off from the Fed, you know, Wednesday definitely felt like kind of a material setback for the dollar.
It's not the end of the dollar up view that we have at this point, but again, it was kind of a tactical setback and the MOF kind of accelerated that for the time being. Just to kind of like walk through what happened, you know, looking at the two o'clock, I thought there were actually some hawkish components at the outset in the prepared remarks. And obviously we got three dissents, which is kind of the higher end of what we kind of were expecting.
So I think reasonably speaking, the 2 p.m. delivery met kind of the hawkish bar that we had been expecting to take the dollar up a little bit. You know, even at two o'clock, the dollar started selling off. And I think in retrospect, you know, our conversations over the kind of preceding 24 hours tended to indicate that people had actually gotten pretty hocked up and were really kind of leaning into this idea that the Fed might actually hike on the day and consistent with that, you saw kind of an uptick in kind of like dollar topside protection in demand earlier in the week.
And so I think just that the fact that they didn't go, even though they delivered three dissents at the outset, it was still kind of like a tactical disappointment for the dollar. But at the time, I was thinking, you know, it really wasn't actually that big of a setback. It was just kind of a positioning squaring and a lot could still be delivered on the press conference.
But obviously, the press conference is where it got significantly more interesting and the dollar sell off got significantly more intense. You know, what happened? Chair cast some doubt on kind of a future of PCE.
He didn't really kind of articulate the conditions for what we would see when we would get a hike, didn't talk much about the dissents, but obviously he kept coming back to this idea that the that the market had done some of the some of the tightening for the Fed in the intermediate period. And, you know, ultimately, I think that all that came off is, I guess, relatively dumbish. But I think more more importantly, our economists are saying basically, quote, this raises questions about the new chair's credibility in delivering lower inflation.
So we're coming back to this idea of, you know, Fed credibility and inflation risk premium. And the dollar response, I think, makes a lot of sense when seen through that kind of perspective. Specifically, if you map kind of the DXY performance on the day, the two thirties curve, which obviously steepen very dramatically in a twist fashion where the short end was lower and the back end was higher.
The dollar sell off matched the contours of that profile very well. That's not surprising. And I would point to two pieces of evidence for that first is that the last time that I can remember, I was having that kind of nasty two thirties steepening was the middle of last year when you might recall there were rumors that the Fed's chair Powell at the time might lose his job to 30 steepen and the dollar sold off fairly aggressively.
However, briefly at the time. So I think the price action this week was kind of consistent with that. And second, you know, we've noted for a long time that of various kind of rate environments, one of the most negative for the dollar is when the short end is falling and when term premium is rising.
You know, when you're talking about things like fiscal risk, for example, you see the term premium rise. If short ends going higher because it's happening against the backdrop simultaneously of strong growth and expectations, the dollar can kind of endure that much, much more easily. But when it's short and lower back and higher historically, it's proven to be quite dollar negative.
So a lot of that all kind of indicating that the dollar did basically what it's supposed to be doing. You know, what we're looking for in terms of other currencies, obviously, with kind of the back end volatility, keeping a close eye on what, you know, sterling and Japan rates are doing given their kind of like similar sensitivity in the last few years to higher long end rates for euro. This could potentially slow down a full convergence to fair value, which is still lower than spot.
But we wouldn't take that to really alter the direction of travel for euro lower in our view. And ultimately, you could see maybe some relief in places like Sweden, but we still see kind of a more kind of bearish top down environment there. So overall, kind of sticking with the pro carry orientation that we've been discussing on this call, you know, ultimately for some time and ultimately just, you know, to wrap up on my end, this question is kind of like, you know, does this kind of continue dollar weaker from here or are there kind of offsets in the meantime?
And I would point to a number of different offsets that I think can stem the bleeding here. First is that, you know, we've actually moved forward. Our Fed call, we're now looking for a hike in December, which ostensibly, according to our economists, you know, the FOMC is feeling compelled to, quote, act to maintain its credibility.
So if they can kind of like shore up those intentions and kind of reaffirm the market here, I think that's going to be obviously dollar positive and we can kind of retrace. Similarly, they're noting September is live. If we pull the trigger earlier, you know, that would also kind of reinforce the idea that, you know, the Fed's not behind the curve and they're acting in kind of a conventional fashion here.
That would be obviously dollar positive as well, especially given a decent amount of September FOMC pricing has kind of come out of the OIS strip the last couple of days. Third, I would note that, you know, the actual repricing on the short end was not all that dramatic. So when you think about short-term rate differentials from the FX space, U.S. didn't actually lose that much relative advantage there.
So there's still kind of like the underlying carry support that we've been talking about for some time. Fourth, some data continues to come in pretty well. Claims certainly stand out these last couple of weeks and might suggest, you know, labor market continues to tighten as we get later in the year.
Obviously, payrolls next week is a big hurdle. But, you know, if you get a solid print there and a low unemployment rate, that certainly kind of keeps pressure on, you know, from that side of the dual mandate. And then finally, obviously, Iran very much unresolved, Brent back at 90 bucks.
That remains, at the very least, in terms of trade support for the dollar, if not kind of more of a geopolitical safe haven, anti-cyclical bid. So keeping a close eye on how that evolves. But some of those things basically suggest that even despite what happened with the Fed, there should be some kind of cross-currents or offsets to further dollar depreciation here.
Junior, I'd like to bring you into the conversation. The other big price action this week was dollar yen collapsing down to the roughly the 158 level. MOF confirmed that it did intervene in the market this week.
We also had a Fed rate check on the back of that. How are you thinking about dollar yen after what has just happened? Yeah, Pat, thank you very much for the question.
So previously, dollar yen 1.60 was seen as a line in the sand level. And actually, the MOF conducted intervention on April 30, when dollar yen moved fastly above 1.60. Given that intervention around 1.62 to 1.63 is not particularly surprising, I can say.
What was somewhat unexpected was that MOF did not intervene immediately, even after dollar yen broke above 1.62, which had been seen as the next line in the sand level. We think it is likely that with limited remaining capability for the intervention, officials were carefully choosing the timing and the tactics that maximize the impact of intervention. From these perspectives, yesterday's MOF intervention, implemented a day after a dervish FOMC pushed broad dollar selling, resembled the intervention on July 11, 2024, when the MOF stepped in the FX market amid the broad dollar weakness following the softer US CPI.
In addition, the fact that the intervention occurred the day before BOJ's late announcement may indicate that MOF was somewhat concerned about the risk that BOJ's communication could be interpreted as a dervish accelerating yen depreciation. Indeed, there have been some historical episodes, such as September 2022 and April 2024, where a yen buying intervention followed a renewed yen weakness after a dervish BOJ. This time, it may have been a preemptive move.
According to the BOJ data, the size of yesterday's intervention is estimated at around 6 to 7 trillion yen. Combined with about 12 trillion yen spent in April and May intervention, the total amount might have reached about 18 to 19 trillion yen already, already exceeding the 15 trillion yen deployed in 2024. We think that the major constraint on further intervention would be authorities' intention to avoid strengthening the perception that intervention capacity is deteriorating due to significant decline in FX reserves.
Under that assumption, the maximum additional intervention capacity would be about the same scale as April and May, about 12 trillion yen. If this assumption is correct, the remaining dry powder is only about 5 to 6 trillion yen, making repeated large-scale intervention unlikely going forward. It also appears that the New York Fed conducted a rate check yesterday.
This is the second rate check since January 23, but the market impact was much smaller than in January's case. It might be because it was less of a surprise than the first time. The market attention is now shifting to whether there could be coordinated intervention.
Historically, however, coordinated intervention has occurred only in the crisis period, such as Japan's financial crisis in 1998 or Great East Japan Earthquake in 2011. So the bar is extremely high, and Japan's current situation is difficult to characterize as a crisis. So I believe that coordinated intervention is highly unlikely.
Taken together, it appears that MOPI is running out of powerful options within the conventional domain of FX intervention and related actions such as rate checks by Japanese and U.S. authorities. This backdrop may help explain the recent wave of official comments pointing to GPIF. Starting with Finance Minister Katayama's July 10 remarks about increasing GPIF as a domestic asset allocation, other government officials followed with similar statements, suggesting the possibility of using GPIF as a tool to address yen weakness and higher GDP.
This likely reflects the reality that as the limits of FX intervention become clearer, policymakers feel pressure to consider the next move to resist further yen depreciation. Authorities may hope to recreate that case in July to August 2024 when the large-scale unwinding of yen short positions contributed to a sharp drop in the yen. We think that it would be very difficult to replicate because today's environment is totally different from that period.
Instead, a more probable path resembles April and May this year. This episode had intervention initially reduce the yen short positions, but the short gradually rebuilt afterward and then returned to pre-intervention level in about a month. In the conclusion, I can say that this intervention could not change any country about structural long-term yen weakness that we expect.
Thanks very much, Junya. It was interesting yesterday following the MOF intervention. There were two schools of thought.
One was that maybe the BOJ could surprise HIKE. Obviously, inflation there is inflecting higher. The prior core forecasts were above the target for the duration of the horizon.
On the other hand, some thought that the MOF intervention was perhaps to preempt yen weakness should the BOJ actually continue to hold the policy rate, which is what happened. On that latter point, I'm interested to hear how you digested the BOJ outcome overnight. Yeah, it is interesting to hear about two camps and the views on the BOJ before that later announcement.
And I can say that I'm on that latter camp. So, as Treasury Secretary Besant has stated repeatedly, the most effective fundamental measure to resist the yen depreciation would be on the BOJ rate hikes. However, in Japan, the Takaichi administration has a strong incentive to push an aggressive fiscal policy.
And as a result, it pressured BOJ to keep interest rate as low as possible. The side effect is weak IM. And authorities are attempting to manage yen weakness through policy measures other than BOJ rate hikes.
Today, the BOJ left policy rate unchanged as expected. Governor Weller's press conference has somewhat hawkish tone, but it did not convey a level of determination that would clearly signal an aggressive stance against yen weakness. So, as you say, if BOJ wants to do so, BOJ could raise rate to stop the yen weakness, but it was not the case.
And our baseline demands that BOJ will continue gradual hikes at a roughly semiannual pace with next hike expected in October. So, in Japan, as a baseline, the Ministry of Finance, the government, is in charge of FX policy, and it can act more flexibly than the BOJ. That makes FX intervention the preferred tool when policy makers want to resist yen depreciation.
But as I said, intervention has limits, and its ability to cap yen weakness is constrained. In that context, attention is shifting to the GPIF as an alternative policy tool. GPIF is overseen by the Ministry of Health, Labor, and Welfare, and its primary mandate is to support pension funding.
However, as seen during the Abenomics era, it is possible, under strong political intention, for allocation shift to be used for another policy objective beyond the original purposes. If the limit of both intervention and the GPIF-based approach become clearer, the government, Takaichi administration, may eventually have no choice but to accept more proactive BOJ rate hikes to restrain yen depreciation. However, I think the Takaichi administration at that time are still some distance away from that point.
That's from me. Thank you. I'm interested in your view covering Aussie and Kiwi rates as well.
What spillover effects have you felt in your space from that? And also, similarly, how are you mapping that over to the currency space as well? Thanks, Pat.
So with the Aussie data, I think the heartening thing, if you were sitting there in the RBA's position, is that you had this pretty material downside surprise on headline inflation, which we can swear to one side by just saying that oil prices obviously normalised pretty quickly through the quarter before the most recent rebound. But the more comforting dynamic was that we just didn't see a lot of breadth in terms of those second order spillovers across the rest of the basket. So when we track the proportion of CPI items that are growing at different thresholds, that right tail of really strong inflation outcomes above 3% or 4% annualised has dropped away quite a lot.
So even with the most recent rebound in crude prices and knowing that some of that will spill over into the third quarter, from a core inflation perspective, there's just space for that to occur without being too disruptive. And still, we think a lot of these energy rebound will be probably trimmed out of the RBA's preferred core measures. So it does consolidate our confidence that the RBA is done here.
From an FX perspective, we've obviously been kind of tilting since May and the RBA pivot away from this kind of Aussie data and hawkishness sort of exceptionalism story towards more of a balanced outlook. There was a repricing of rates, which I think had to happen in the context of the CPI data. Aussie had entered that.
You know, somewhat rich on a few of our models. So I think the step back kind of makes sense. But broadly speaking, we do think the range is kind of collapsing here a bit in Aussie.
It's still a high hold scenario. We think now with what's priced, for the downside, just in the sense that it's going to be hard for the market to really price full some cuts into 2027, given the Fed backdrop and given that the consumer data we think are going to be leveling out here. In terms of your question on the Fed spillovers, it's kind of a tough one to characterize, obviously, in terms of how it feeds through the rates framework, because, you know, on the one side, if we're just taking our at face value, the hawk dove score metrics, which we look at, you know, the Walsh kind of press conference, the initial statement screened pretty hawkish.
But then the comments in Q&A, which kind of undermined that in respect to, you know, some fuzziness around more PCE as a benchmark, kind of downplaying the significance of the Fed funds rate in the transmission of monetary policy that obviously cuts in the other direction. What we have found in the past is that hawk dove scores generally, in terms of how they map through to DM front end rates, there is a very strong common factor among them. To the extent that this is an idiosyncratic kind of Fed story, which is really about communications and the reaction function, it does feel quite different to what's been dominating the evolution of those scores and central bank tone over the last few years, which has been generally just common shared by inflation.
So definitely opens up potentially a window where you could see a little bit more relative support for some of the usual high bettors like Aussie and Kiwi if we are going to be getting like an idiosyncratic, you know, dovish Fed concern coming through there. But really, I'd say from these models, it's kind of mixed messages. We didn't see a huge amount of domestic market reaction in rates in the fallout from the Fed.
I think most of what we're more concerned about in rates is really the long end of the curve, given the term premium story that's reawakening there. But yeah, for now, it's a kind of watch and wait and a little bit of shadows of some of the dynamics we saw, you know, post-liberation day, which we'll obviously have to see if any of that messaging, you know, kind of gets corrected in coming weeks from the Fed. All right.
Thanks very much for that, Ben. All right. Now, to conclude, Kunj, I'd like to bring you into the conversation.
With everything going on with Japan and the U.S. this week, it seems like the BOE kind of flew under the radar, but you still had a decent rally on the short end on the day. What do you make of what happened out of the BOE? And how do you think that passes over into the FX?
Yeah, sure. Thanks, Pat. And I think that is a good way to put it, that the BOE maybe slid a bit under the radar with the Fed and the BOJ as well.
But, I mean, overall for the BOE, we saw the decision itself as relatively mixed. And so the Sterling FX impact seemed relatively muted. The decision itself, you know, the BOE kept the rates unchanged at 3.75 as expected.
But the vote split came in at 6.3 rather than the 7.2 consensus that the market was looking for with Catherine Mann joining the existing hawkish dissenters, Pill and Green, in voting for an immediate rate hike. So that was sort of the main hawkish surprise and did initially support Sterling a bit. The forecast also leaned slightly hawkish on balance, you know, growth revised higher, unemployment revised lower, and the BOE continuing to emphasize upside risks to inflation.
So those were sort of the more hawkish components of the decision. But that was tempered a bit by the messaging elsewhere with the minutes notably highlighting soft demand and easing labor market and only limited evidence so far that higher energy prices were actually feeding into broader inflation pressures. And then on top of that, Governor Bailey, during the press conference, sort of explicitly pushed back on this idea that the BOE is moving towards an imminent hike and stressed that the policymakers can remain patient for now.
So on the back of that, you know, we did see the front end rates rally and the OIS pricing come off a bit as well with markets no longer pricing in the next BOE hike until the December meeting. Our official JPM Econ forecast here looks for the BOE to hike again in November. But our economists do flag that there is a burden on the data here where we would need to see either some combination of inflation overshooting the bank's forecast, growth being a bit more resilient, and or wage growth coming in higher than expected in order for the conditions to be met for that November hike to be delivered.
So on the FX side overall, the Sterling reaction was a bit muted. You could argue the hawkish vote showed there is still some concern about inflation within the committee. But the kind of broader rhetoric around the meeting maybe tempered the reaction a bit.
And so for Sterling itself, you know, we have a more neutral view at the moment. And we do think now with the BOE behind us and some of the local politics headlines fading a bit as well, that Sterling could be a bit more responsive to the broader global environment in terms of what's going on with the dollar and risk assets more generally. Thanks very much for that, Kunj.
I think we'll leave it there for this week. Thank you, everybody, for joining. This communication is provided for information purposes only.
Please refer to JPMorgan Research Reports related to its content for more information, including important disclosures. 2026 JPMorgan Chasing Company, all rights reserved. This episode was recorded on July 31st, 2026.
Sources & References
How we cover this story