The US dollar is expected to start a cyclical decline, with the Japanese yen breaking through 140 for the first time since 2023

The Japanese yen against the US dollar breaking through 140 is a key psychological barrier, continuing its upward trend since hitting a near 38-year low in July. On Monday, the Japanese yen against the US dollar briefly appreciated by 0.6% to 139.96, the highest level since July 2023. The yen is the best-performing currency among the G10 countries this quarter, rising by 15% as investors expect the interest rate gap between the US and Japan to further narrow.

The Federal Reserve seems almost certain to cut interest rates this week, with the only question being by how much, while the Bank of Japan is expected to stand pat on Friday after two rate hikes earlier this year. With reduced liquidity during the holiday period, there is a renewed bet that the US will cut rates by a larger margin than usual, causing the Bloomberg Dollar Spot Index to fall to its lowest level since January.

Macquarie Group's strategist Gareth Berry in Singapore said, "It's mainly the countdown to the Fed, and the risk that they might cut by 50 basis points this week instead of 25, which is supporting the yen. Even if expectations for Fed easing haven't changed, the passage of time alone will push the dollar lower against the yen."

Since hitting a low of 161.95 on July 3, the fate of the yen has undergone a dramatic change. Japan has intervened in the market multiple times to boost the yen, but now the rapid rise of the yen has affected exporters' prospects, thereby impacting the Tokyo stock market.

While the Bank of Japan may not change borrowing costs this week, most economists surveyed by Bloomberg believe the bank will hike rates again in December. The Bank of Japan raised its policy rate to 0.25% on July 31, causing global markets to be volatile in early August, impacting assets from currencies to bonds and stocks. On September 3, Bank of Japan Governor Haruhiko Kuroda confirmed that if prices align with expectations, the bank will raise rates, supporting the yen's rebound.

Committee member Junko Nakagawa said in a comment on September 11 that if the economic performance aligns with their forecasts, the bank will continue to adjust its policies.

In addition to the Bank of Japan's policies, the rapid unwinding of so-called carry trades has also driven the yen's appreciation. Carry trades involve traders borrowing yen at low rates and investing the proceeds in higher-yielding currencies. Many strategists have abandoned their previous predictions of a weaker yen and now expect the yen to strengthen from current levels.

In early July, when the yen hit multi-decade lows, some warned that even with Japanese intervention, they could not stop the decline in the exchange rate, with bears predicting the yen against the dollar to fall below 170. Richard Franulovich, head of currency strategy at Westpac Banking Corporation in Sydney, said, "The dollar against the yen may continue to decline in the next one to three months, possibly between 137-138. The dovish Fed and hawkish Bank of Japan are undoubtedly priced in, but reality may also have an impact National Australia Bank strategist Rodrigo Catril said: "We believe that the Federal Reserve is about to usher in a new round of easing cycle, which is a major disadvantage for the US dollar. As the Federal Reserve relaxes monetary policy next year, lowering the fund rate to neutral, or even below neutral, the dollar will begin to decline cyclically."

However, a technical indicator shows that as momentum turns bearish, the dollar will find support. "Although there is a risk of the Federal Reserve starting the easing cycle ahead of schedule, we believe that the market has overestimated this risk. The Federal Reserve will cut interest rates by 25 basis points this week, which will drive a rebound in the dollar," said David Forrester, strategist at Singapore Agricultural Credit Bank.

Nevertheless, the market overwhelmingly supports a weaker dollar. Bloomberg's survey of analysts shows that by this time next year, the euro, yen, Canadian dollar, and Australian dollar are all expected to strengthen against the dollar. Bob Savage, head of New York Bank's market strategy and insights, wrote in a report: "Unexpectedly dovish actions by the Federal Reserve may weaken the dollar." He wrote that this could "alter the inflation forecasts of countries such as the UK that import commodities priced in dollars, and prompt the Norwegian central bank to support the krone linked to oil."