Yen Weakens Again After Hawkish Fed Rate Hike; Dollar Could Reach 160 if BOJ Disappoints

The yen resumed its slide after the Federal Reserve delivered a hawkish rate increase, turning market attention to the Bank of Japan's rate decision on September 18 and any signal of additional tightening.

Bloomberg reported on September 16 that the yen fell as much as 1% against the dollar intraday after the Fed's decision, touching 156.42 per dollar. The currency had strengthened earlier this month on expectations of faster BOJ tightening and an unwinding of yen-funded carry trades, but has since reversed course.

The Fed's first benchmark rate increase since 2023, along with its signal of further tightening ahead, weighed on the yen. Markets are pricing in the possibility of three additional Fed rate hikes by the middle of next year. That has raised concern that even if the BOJ increases rates this week, the gap between U.S. and Japanese borrowing costs could remain in place for an extended period.

Markets are focused less on whether the BOJ will raise rates and more on the pace of tightening that follows. Overnight index swaps have effectively priced in a 0.25 percentage-point increase, leaving BOJ Governor Kazuo Ueda's guidance on further hikes as the key issue after the decision.

Glenn In, research director at ACCM, said Japan is under heavy pressure to pair any rate increase with a hawkish message to limit yen weakness. If the BOJ falls short of market expectations, the currency could quickly weaken to 160 per dollar.

Rising oil prices are also strengthening the case for BOJ tightening, some market participants say. Rinto Maruyama, chief interest-rate and foreign-exchange strategist at SMBC Nikko Securities, said yen weakness gives the BOJ more reason to emphasize inflation risks, while higher crude prices could also bolster the case for additional tightening.

Still, there is also a view that the BOJ has limited scope to signal a 0.50 percentage-point increase or back-to-back hikes, given that this move would bring Japan's policy rate into the estimated neutral-rate range. Maruyama said dollar-yen could first head toward 158 if the meeting is interpreted as dovish. If U.S. rates continue to rise faster than Japan's, the pair could eventually test 160 again.

Akira Moroga, chief market strategist at Aozora Bank, also said a rate increase alone may not be enough to support the yen. If the BOJ does not strike as hawkish a tone as the Fed, yen weakness could resume, with 158.50 per dollar as the next key threshold.

Even so, the pace of further losses may be more limited than before. Carry traders suffered losses during the yen's recent surge, and hedge funds have also reduced bearish bets on the currency. The possibility of foreign-exchange intervention by U.S. and Japanese authorities is another factor that could restrain any sharp decline in the yen.