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Dollar Rally Pauses as Yen Finds Support on G7 Assurance

The dollar experienced a slight retreat on Thursday as investors reevaluated the U.S. interest rate outlook following remarks from Federal Reserve officials, indicating that monetary policy would likely remain restrictive for the foreseeable future.

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In contrast, the yen briefly strengthened after Japan’s top currency diplomat, Masato Kanda, stated that finance leaders of the G7 reiterated their commitment to avoid excessive currency volatility.

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Recent weeks have seen the dollar strengthening, fueled by robust U.S. economic data, persistent inflation, and geopolitical tensions in the Middle East, which have bolstered its status as a safe-haven asset. This dollar strength has put pressure on other currencies, including the yen, which has hovered near 34-year lows, prompting concerns from Japanese authorities about potential intervention.

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The U.S., Japan, and South Korea agreed to closely monitor foreign exchange markets in their first trilateral finance dialogue, signaling potential joint intervention efforts if the Japanese yen and South Korean won continue to weaken against the dollar.

Although the Japanese currency temporarily strengthened, reaching 153.96, it remained close to the 34-year low of 154.79 reached earlier in the week.

Market expectations regarding potential intervention by Japanese authorities have shifted, with attention now focused on the 155 level, up from 152 previously. However, given the broad strength of the dollar, there are suggestions that intervention may be considered at even higher levels, possibly around 156.

The euro and sterling remained relatively stable against the dollar, while the dollar index, which measures the greenback against six major currencies, edged down from its recent highs.

Market sentiment regarding Fed rate cuts has shifted, with traders now pricing in a lower probability of rate cuts compared to earlier in the year. While there had been expectations of rate cuts starting in June, recent data, including the consumer price index (CPI), and comments from central bankers have pushed back these expectations, with September now seen as a more likely starting point for easing monetary policy.

In Australia, the Australian dollar edged up slightly against the greenback, while the New Zealand dollar eased after a modest increase on the previous day.

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