The US dollar reached a 10-month high against other major currencies, causing the euro and the pound to hit six-month lows. The yen also remained in intervention territory. This surge in the dollar is due to expectations of higher interest rates in the US. While US Treasuries stabilized after a recent selloff, yields are still at 16-year highs, making the dollar highly sought-after. The euro is on track to lose over 3% for the quarter, its worst quarterly performance in a year, while the pound is heading for a quarterly loss of more than 4%. The US dollar index reached a 10-month high, showing the strength of the dollar in the international market.

The increase in US yields has negatively impacted the yen, causing it to remain at a low level against the dollar. The dollar/yen pair is sensitive to changes in long-term US Treasury yields. There are concerns that the slow but steady decline of the yen, approaching the psychological level of 150 per dollar, may lead to intervention by Japanese authorities, as they did last year. However, even if intervention occurs, it may not permanently bring down the dollar/yen pair unless bond yields start to retreat significantly. The minutes of the Bank of Japan’s July meeting revealed that policymakers agree on the need to maintain loose monetary settings but are divided on when to end negative interest rates.

In other currency news, the Australian dollar fell slightly, in spite of data showing an increase in Australia’s inflation. It is expected that the Reserve Bank of Australia will maintain interest rates at 4.1% at their next meeting. On the other hand, the Swedish krona has been strengthening against the dollar and euro due to the central bank’s decision to hedge part of its forex reserves to reduce risk. This unexpected move has driven the strength of the Swedish krona this week.

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