Dollar rebounds as expectations for a US rate hike ease

The US dollar rose against most major currencies during Friday's trading, recovering from the sharp losses recorded in the wake of the Federal Reserve's latest policy meeting.

The dollar gained about 0.3% during the session after falling nearly 2.4% on Thursday, its largest daily decline since January 2023.

Federal Reserve and inflation

The Federal Reserve left interest rates unchanged at its meeting on Wednesday, while Fed Chair Kevin Warsh reaffirmed the central bank's commitment to lowering inflation, leaving markets uncertain about the future path of monetary policy.

Traders now assign a 63% probability to an interest rate increase at the Federal Reserve's September meeting, down from more than 80% a week earlier, according to CME Group's FedWatch Tool.

Data released on Thursday showed that US inflation slowed in June. However, the improvement could prove temporary as renewed tensions in the Middle East have pushed oil prices higher.

The surge in energy costs has also reinforced inflation concerns and strengthened expectations that US interest rates will remain elevated.

Yen briefly rises

The Japanese yen briefly strengthened during Friday's trading as investors watched for a possible second round of foreign exchange intervention after Japanese authorities stepped into the market to support the currency on the previous day.

The yen rose as much as 0.6% to ¥158.535 per dollar during morning trading in London before quickly surrendering its gains. It was last down 0.3% at ¥159.905 per dollar, after earlier weakening to ¥160.90 following the Bank of Japan's decision to leave its short-term interest rate unchanged at 1%, in line with market expectations.

Thursday's intervention, which involved buying yen and selling dollars, put the Japanese currency on course for its strongest weekly gain since February and a monthly increase of more than 1.7%, pulling it away from four-decade lows. However, the move failed to provide lasting support.

Meanwhile, the Bank of Japan, which raised interest rates last month to their highest level in 31 years, signaled that further monetary tightening could follow after warning for the first time that underlying inflation may exceed its target, pointing to a possible rate increase as early as September.

Bank of Japan Governor Kazuo Ueda said several board members expect inflation to remain relatively high and believe that risks are tilted to the upside.