Yen Weakens Further Against Dollar as Hawkish Fed Bets Dominate

USD/JPY extended its advance during European trading on Wednesday, with the pair rising to the 157.70 level. The move was primarily driven by hawkish Federal Reserve policy expectations, with the dollar continuing to outperform most non-US currencies, while the yen remained under pressure as US-Japan yield differentials showed little sign of narrowing.

**Hawkish Fed Expectations Provide Support**

Fed Chair Warsh's recent hawkish remarks have boosted market bets on rate hikes. Allianz Chief Economic Advisor El-Erian noted that the flattening of the US Treasury yield curve reflects a hawkish repricing in fixed-income markets—the short end reacting to Warsh's firm commitment to inflation targets, while the long end implies recognition of the Fed's credibility. According to Barclays forecasts, the Fed may hike 25 basis points each in September and December, and this expectation continues to give the dollar an interest rate advantage. Swissquote analyst Ozcaydeska reminded that Warsh still needs to restore policy credibility by "walking the talk," and may even need to take actions that displease the White House.

**Yen Weakness Sparks Intervention Concerns**

The yen has been weak recently, with Nomura Chief Economist Kiuchi Toshihiro stating that USD/JPY breaking below the 160 level has raised the likelihood of joint intervention. US Treasury Secretary Bessent plans to meet with Bank of Japan Governor Ueda Kazuo during the G20, with market consensus expecting the US side to urge Japan to adopt "prudent fiscal policy" and proceed with rate hikes to mitigate risks from yen depreciation and elevated JGB yields. Allianz's El-Erian also said the yen approaching 160 again will inevitably intensify intervention speculation, while Bessent previously warned in a letter to Congress that disorderly yen market conditions could trigger forced liquidation of US Treasuries and push up US borrowing costs.

**Outlook Remains Uncertain**

Despite the dollar holding the upper hand in the near term, market views on the yen's prospects remain divided. JPMorgan Asset Management believes that as markets price in two more Fed rate cuts this year, the dollar's yield advantage is gradually fading, leaving room for further weakness. Meanwhile, the Bank of Japan is in a rate hike cycle, and monetary policy divergence is expected to persist through the year. In the near term, whether USD/JPY can hold key levels and the trajectory of US-Japan policy interactions remain the market focus.