USD/JPY: Yen Chips Away at Dollar’s Dominance as Traders Ramp Up Rate Hike Bets for 2025

Bank of Japan is expected to gradually raise its benchmark interest rate next year as it struggles to control inflation pressures.

• The USDJPY pair turned away from a 6-month high of ¥158.00 after traders acted on their conviction that the Bank of Japan will move to gradually raise its benchmark interest rate in 2025. The dollar-yen slumped to ¥156.00, with the yen erasing about 200 pips from the US dollar’s dominance. While a speculative move, the rush to buy up the yen highlights investors’ expectations for next year’s central bank moves.
• The Bank of Japan has been reluctant to hike borrowing costs, saying they need to stay low for the economy to continue growing (or least not take a dip). But with loose monetary policy comes the risk of inflation flaring up. And that’s what’s been happening in Japan. The “core-core” inflation rate — which strips out prices of fresh food and energy and is monitored by the BOJ — rose to 2.4% in November from 2.3% in October, its highest level since April.
• Over to the US side of things, the dollar has been largely buoyed higher by recent moves from the Federal Reserve and President-elect Donald Trump. The Fed has stated it is looking to cut interest rates twice next year, downwardly revising its guidance from four. In other words, rates will stay higher for longer. The White House, in the meantime, is looking to bolster the dollar by lowering taxes and slapping tariffs on imports.