The dollar is closing in on its biggest monthly loss against the yen in 2 years, even as the Fed hikes interest rates aggressively

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The dollar is closing in on its biggest monthly loss against the yen in 2 years, even as the Fed hikes interest rates aggressively
The Japanese yen is on track for its strongest monthly gain against the US dollar in three years.Thomson Reuters
  • The yen is on track for its largest monthly gain against the dollar in two years.
  • The dollar has slipped 1.75% month-to-date against the Japanese currency.
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The Japanese yen is on track for its largest monthly gain against the US dollar since 2020, despite the Federal Reserve and Bank of Japan adopting differing views on how to tame soaring inflation.

The dollar has slipped 1.75% against so far this month, meaning it now trades at just over 133 yen. This is still only 5% below a 24-year high above 139 reached two weeks ago, but it's the largest one-month drop since July 2020.

The greenback has seen its dominance fade somewhat, despite the Fed's back-to-back 75 basis point interest rate hikes, which tend to increase the value of a country's currency. In contrast, the BoJ has taken a dovish approach to taming inflation and is one of the few central banks that hasn't yet delivered any rate hikes, despite consumer price pressures running at their highest in almost eight years.

Analysts said the dollar's diminishing strength reflected investors' fears about the overall state of the US economy.

"Bad US data will be bad for the dollar, especially versus the yen and Swiss franc," Pepperstone's head of research Chris Weston said. "The USD is a true cyclical currency – as opposed to a safe-haven play - and it means economic data is now far more important as the Fed is no longer on autopilot with regards to rate hikes."

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The yen's rebound comes after it slipped towards 24-year lows against the dollar back in June and into July. The currency has become a popular option for foreign exchange traders that want to borrow the yen cheaply in order to sell it and buy higher-yielding currencies, due to the BoJ's ultra-dovish interest rate stance — a practice known as the "carry trade".

Selling the yen has been one of the big currency plays of 2022. Speculators ran up a record short position in the currency earlier this year, in part because of the BoJ's rates policy, but have since chipped away at it, which has accounted for some of the recent strength in the yen. Those bearish bets are now roughly half the size they were at their peak back in the spring, according to data from the Commodity Futures Trading Commission.

Read more: Cash is king for retail traders right now, according to 7 investors who expect a prolonged bear market for stocks, bonds, and cryptocurrencies

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