Dollar steadies as focus shifts to Fed, BOJ meetings

The dollar is nearing multi-week lows, poised for its largest weekly decline in a month, as markets anticipate key central bank meetings next week, with both the Federal Reserve and Bank of Japan expected to hold rates but provide crucial forward guidance. While a recent US-Japan auto tariff deal has improved prospects for a BOJ rate hike this year, broader trade negotiation uncertainties, including upcoming US-China talks, are influencing global monetary policy, with analysts suggesting tariff uncertainty is delaying Fed rate cuts despite disinflationary pressures.

Analysis

The U.S. dollar is experiencing significant downward pressure, on track for its largest weekly drop in a month with the dollar index at 97.448, reflecting investor caution ahead of pivotal central bank meetings. Both the Federal Reserve and the Bank of Japan are expected to hold policy rates steady, but their forward guidance will be critical. In Japan, the yen has gained nearly 1% against the dollar for the week, supported by speculation of a future rate hike; a Reuters poll indicates a majority of economists expect a 25 basis point increase this year, a prospect enhanced by a recent U.S.-Japan trade deal that lowered auto tariffs to 15%. However, sources indicate the timing remains contingent on the economy's ability to absorb U.S. tariffs. Meanwhile, the Fed is anticipated to maintain its benchmark rate at 4.25%-4.50% and reiterate a patient, data-dependent outlook. Notably, strategists at ANZ suggest that rate cuts, specifically 25 basis points in September and December, are being delayed primarily by tariff uncertainty rather than economic fundamentals, citing a weakening labor market and established service price disinflation. This theme of trade policy influencing monetary decisions is echoed in Europe, where the ECB has held its rate at 2%, contributing to the euro's 13.5% gain against the dollar this year.

Key Decisions for Investors

• Investors should closely monitor forward guidance from the Federal Reserve and Bank of Japan next week, as any divergence in their outlooks on rate paths will likely drive significant volatility in the USD/JPY currency pair.
• Given the assessment that U.S. tariff uncertainty is the primary factor delaying Fed rate cuts, any positive developments in trade negotiations, such as the upcoming U.S.-China talks, could accelerate market pricing for monetary easing.
• The euro's substantial 13.5% year-to-date appreciation against the dollar highlights a durable trend, suggesting investors may consider evaluating long-euro positions as trade policy continues to weigh on the greenback.
• With the Australian dollar reaching an eight-month high on improved risk appetite from trade deals, positions in commodity-linked currencies and other risk-on assets could benefit from further progress on global trade resolutions.