What’s going on here?

The US dollar hit an eight-week high against the yen and approached a five-week peak against sterling, driven by Federal Reserve policies.

What does this mean?

The dollar’s strength largely stems from the Fed’s cautious approach toward interest rate cuts. Unlike other central banks, the Fed kept its policy unchanged at the June meeting and reduced the number of projected rate cuts for this year from three to one. While inflation has moderated and the labor market has eased, the Fed’s stance contrasts with the more aggressive rate-cutting of other central banks. This divergence has bolstered the dollar, pushing the dollar index up 0.41% overnight and turning it positive for the week.

Why should I care?

For markets: Currency chess games in motion.

The Fed’s steady hand has kept the US dollar strong, affecting major currency pairs globally. The Swiss National Bank’s latest rate cut saw the dollar climbing 0.07% against the Swiss franc after an overnight 0.78% jump. Meanwhile, the Bank of England’s indecision on rate cuts left sterling flat near its lowest level since mid-May. And while the euro made a slight recovery, it couldn’t reverse its recent 0.39% slide. These central bank actions and the resulting currency fluctuations have significant implications for global trade and investment strategies.

The bigger picture: Global central banks play catch-up.

Globally, central banks are grappling with diverse economic challenges. The Bank of Japan delayed cutting bond-buying stimulus until July, weakening the yen and prompting Japan to intervene in the currency market. Recently, Japan spent nearly $62 billion to stabilize the yen, and the US Treasury has added Japan to a watchlist for potential currency manipulation. Amid these dynamics, the yen struggles at its lowest levels in decades, highlighting the global imbalance in monetary policies and their broader economic impacts.