Dollar Posts Worst Monthly Loss Since April as Fed Uncertainty and Yen Intervention Shake FX Markets

The U.S. dollar ended July with its weakest monthly performance since April, as growing doubts over the Federal Reserve’s commitment to controlling inflation weighed on the currency and fueled a sharp sell-off in U.S. bonds. The U.S. Dollar Index (DXY), which measures the greenback against six major currencies, closed at 99.83, down 1.3% for the month.

Most of the dollar’s losses came this week after the Federal Reserve kept interest rates unchanged. While the decision was widely expected, investors were unsettled by three dissenting votes from Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan, all of whom favored a 25-basis-point rate hike due to persistent inflation risks.

Market participants also expressed disappointment with Fed Chair Kevin Warsh’s comments, which offered little guidance on the central bank’s next policy move. Rising Treasury yields throughout July reflected increasing investor concerns that the Fed may not be acting aggressively enough to contain inflation, particularly after oil prices rebounded amid escalating Middle East tensions.

Interactive Brokers senior economist José Torres said bond markets are signaling that the Fed could face mounting pressure to raise rates at its September meeting if inflation remains elevated. He noted that the widening gap between the Fed’s cautious approach and market expectations has intensified uncertainty across fixed-income markets.

Meanwhile, the Japanese yen strengthened for a second consecutive day, with investors pointing to suspected intervention by Japanese authorities after the currency recently touched a four-decade low against the dollar. The USD/JPY pair recorded its worst weekly performance since August 2024, overshadowing the Bank of Japan’s widely expected decision to leave its benchmark interest rate unchanged at 1%.

The BoJ maintained its policy in an 8-1 vote, with board member Hajime Takata again calling for a 25-basis-point rate increase. The central bank also lowered its core inflation forecast while slightly raising its economic growth outlook, citing government support measures.

Elsewhere, the euro rose 1% in July to $1.1537 after stronger eurozone inflation and GDP data boosted expectations of a European Central Bank rate hike in September. The British pound also gained 1.7% during the month, finishing at $1.3484.