Japanese Yen declines as upbeat US PMI lifts the US Dollar, yields

• The Japanese Yen slides as hawkish Fed expectations keep the US Dollar firmly bid.
• Strong US business activity data lifts the probability of another Fed rate hike in October.
• USD/JPY approaches 160, bringing the risk of intervention by Japanese authorities into focus.

The Japanese Yen (JPY) extends its decline against the US Dollar (USD) on Wednesday, with USD/JPY climbing to a three-week high as the hawkish Federal Reserve (Fed) outlook keeps the Greenback in demand. At the time of writing, the pair trades around 158.18, up 0.50% on the day.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, trades around 101.00, its highest level since July 30.

Expectations of another Fed rate hike gained traction after stronger-than-expected US business activity data. The preliminary S&P Global US Composite Purchasing Managers’ Index (PMI) rose to 58.4 in September from 56 in August. Manufacturing PMI climbed to 57, beating the 53.5 forecast, while Services PMI rose to 58.7 against expectations of 56.

The data reinforces expectations that the Fed can remain on its tightening path after raising interest rates by 25 basis points (bps) last week as it works to bring inflation back to its 2% target. Elevated Oil prices linked to the war in the Middle East keep inflation risks tilted to the upside. US-Iran diplomatic efforts resume after both sides held indirect talks on the sidelines of the United Nations General Assembly on Tuesday. US Secretary of State Marco Rubio described the talks as “positive” but “not a breakthrough.”

According to the CME FedWatch Tool, traders now see a 73% chance of another rate hike at the October meeting, up from around 53% before the PMI release.

Fed Governor Michael Barr added to the hawkish tone on Wednesday, saying that “inflation is not clearly trending toward our target in a timely way,” while “economic growth is strong” and “the labor market is solid.” Barr added that “further rate hikes are likely needed to ensure a timely return to 2% inflation.”

Expectations of additional tightening and persistent inflation concerns push US Treasury yields to fresh multi-year highs. The benchmark 10-year yield rises to around 5.13%, its highest level since 2007, while the rate-sensitive 2-year yield climbs to 4.94%, its highest level since 2024.

For the Japanese Yen, expectations of higher borrowing costs in the US keep the interest-rate differential wide. Elevated Oil prices add another headwind, as Japan relies heavily on imported energy. The Bank of Japan’s (BoJ) rate hike last week has also offered little support.

The BoJ raised its policy rate by 25 bps to 1.25%, its highest level in 31 years, but two dissenting votes and limited guidance on future hikes prompted traders to view the decision as slightly dovish. Still, traders may hesitate to push USD/JPY much higher as the pair moves closer to 160, where intervention risks could rise.