Yen Slides as Fed Hike Odds Hit 92.4 Percent

The US dollar strengthened against the Japanese yen on Tuesday morning. The USD/JPY exchange rate rose to 154.55 in early Asian trading. This move reflects growing expectations for tighter US monetary policy.

Traders are pricing in a high likelihood of a Federal Reserve interest rate increase. The probability of a hike reached 92.4 percent on Monday. This figure is up from 60 percent one week earlier, according to CME FedWatch data.

Fed Decision Looms Behind Yen Weakness

August US consumer price data showed higher inflation than expected. Core inflation posted its largest gain in four months. These figures reinforced bets that the Fed will begin tightening policy later this week.

Lee Hardman, a senior currency analyst at MUFG, noted the dollar's modest gain. He attributed the strength to building expectations for Fed tightening. The market focus shifts to the Fed's decision on Wednesday.

Bank of Japan Faces Key Policy Meeting

The Bank of Japan is set to raise its policy rate on Friday. Its last rate at 1.25 percent was in April 1995. A 25 basis point hike is already fully priced by markets.

Investors will watch Governor Kazuo Ueda's speech closely. They seek signals on the pace of future rate hikes. MUFG analysts say the yen needs a faster tightening path to strengthen further.

Speculative Positioning Shifts in Yen Favor

DBS analysts report a shift in speculative positioning toward the yen. Speculators unwound short yen positions after recent US-Japan currency intervention. Expectations of further Bank of Japan tightening support this change.

Political support for normalization has improved. US Treasury Secretary Scott Bessent implicitly pushed back against fiscal instincts in Japan. This gave the Bank of Japan more room to raise rates, according to DBS. GN markets/policy (en-US) notes that this environment reinforces a hawkish stance from the central bank.