United States Dollar Index loses ground on possible Yen intervention

• The US Dollar Index gives back its intraday advance after reaching its highest level since August 14.
• Suspected intervention lifts the Japanese Yen across the board and weighs on the Greenback.
• US private payroll growth slows in August ahead of Friday’s Nonfarm Payrolls report.

The US Dollar Index (DXY) trades on the back foot on Wednesday as a sharp rise in the Japanese Yen (JPY) forces the Greenback to reverse its earlier intraday gains. At the time of writing, DXY trades around 99.55, down 0.11% on the day, after reaching 99.86, its highest level since August 14.

The Japanese Yen strengthens across the board, with USD/JPY plunging nearly 1% after flirting with the 160 threshold and last trading around 158.80. The speed of the move raises speculation that Japanese authorities may have intervened in the foreign exchange market or conducted a rate check. However, there is no official confirmation of either action. The US and Japan last carried out coordinated intervention in late July after USD/JPY climbed to a 40-year high near 164.

The move spills over into the broader foreign exchange market, with EUR/USD and GBP/USD bouncing off their intraday lows. Weaker-than-expected US labour market data also adds to the downside pressure on the Greenback. The ADP Employment Change showed that private-sector payrolls increased by 38K in August, below the 47K forecast and July’s 46K increase.

Additional US Dollar losses could remain limited as hawkish Federal Reserve (Fed) expectations and escalating hostilities in the Middle East support underlying demand. According to the CME FedWatch tool, markets price in around a 70% probability of a rate hike at the September 15-16 meeting, up from 36% a week ago, following Fed Chair Kevin Warsh’s tougher stance on inflation at the Jackson Hole Symposium.

US Treasury yields also stay elevated across the curve. The benchmark 10-year yield trades around 4.79% after touching 4.81%, its highest level since October 2023.

Analysts at MUFG/BTMU caution that “a Fed hike this month would pose upside risks to our forecasts for the US Dollar,” particularly “if it marks the start of a tightening cycle.” They note that the usual support channels “from higher yields and higher energy prices has not yet fully fed through to the US Dollar,” which in their view “has been held back by the pricing in of a higher US policy risk premium.”

Looking ahead, traders await Friday’s Nonfarm Payrolls (NFP) report for fresh clues about the US labour market and the Fed’s monetary policy outlook.