Dollar, euro little changed, yen extends rally ahead of Fed, ECB, and BoJ meetings

The U.S. dollar made small moves on Wednesday, as the focus remained on the Japanese yen amid its massive rally. Currency market participants were gearing up for a crucial week ahead that will see interest rate decisions from the Federal Reserve, the Bank of Japan, and the European Central Bank.

The U.S. bond market was also in the spotlight after a highly anticipated Treasury Department update on buyback operations disappointed investors.

At 15:42 ET (19:42 GMT), the U.S. dollar index, which tracks the greenback against a basket of six major peers, was up 0.1% to 98.83. 

Yen continues to hover at over seven-month high 

The Japanese yen has emerged as the standout performer among major currencies, boasting a 4% surge in September alone. Its explosive rally since the start of this month took it to as high as 152.89 against the dollar on Tuesday. On Wednesday, the yen strengthened again, with the USD/JPY pair last down 0.2% to 153.63. 

The currency has been buoyed by a combination of Bank of Japan (BoJ) policy tightening expectations and widespread intervention speculation. Financial markets are pricing in a near-certainty of a 25 basis point rate hike by the BoJ on September 18, and traders believe Governor Kazuo Ueda could signal additional normalization before year-end.

"The yen’s rally reflects a genuine fundamental and technical shift, with the BoJ moving deeper down the path of policy normalization and trend breaking. Watch the 152 level closely as a decisive break below this support level could accelerate the yen rally, force additional short covering, and reignite yen carry trade unwind risk, which could have ripple effects across global assets, including U.S. Treasuries," Adam Turnquist, chief technical strategist at LPL Financial, said on Tuesday.

Official data earlier this week revealed Japan’s foreign securities holdings dropped by a record $87.8 billion in August. The sharp fall in reserves directly financed Tokyo’s massive 15 trillion yen ($97.67 billion) currency intervention operations - conducted partly in tandem with Washington.

U.S. bonds slump ahead of key inflation data 

At home, U.S. Treasury yields surged as bonds were dumped after the Treasury Department said it would buy back up to $6 billion in 10-year to 20-year maturities, up from $2 billion previously. The department last month said it would increase the buyback sizes to at least $4 billion, while media reports said the expectations had been for at least $10 billion.

The benchmark U.S. 10-year yield was now up 3.5 basis points to 4.839%. It had been up 1.2 basis points to 4.816% before the announcement. The shorter-end, more rate-sensitive 2-year yield was now up 2.7 basis points to 4.425%. Higher rate environments tend to generally strengthen the dollar. 

The Treasury’s move had been seen as surprise intervention action to cap a surge in yields amid a sustained rout in government debt.

The sell-off had been driven by a combination of factors including inflationary concerns due to soaring oil prices, jitters over the massive amount of debt being issued by companies to fund their artificial intelligence infrastructure buildouts, and worries over ballooning U.S. national debt.

"The problem with trying to artificially cap long-term yields - as with Treasury buybacks - is that yields jump if markets think buybacks are too small. This tells you underlying upward pressure is intense," Robin Brooks, senior fellow in economic studies at the Brookings Institution, said.