Counterintuitively, rising expectations for a Bank of Japan (BOJ) rate hike have been accompanied by yen depreciation. The market believes the BOJ's policy is falling behind the curve, which will eventually force more aggressive action and accelerate yen weakness. This perception must be changed for rate hikes to strengthen the yen.
Unlike the 2024 episode, a significant yen appreciation is improbable now due to key differences. Today's Bank of Japan rate hikes are largely priced in, the US dollar is broadly strong (not weak), and speculative yen short positions are smaller. This suggests any intervention or rate hike will have a more limited impact.
The US dollar has been trading cheaply relative to interest rates. A hawkish Fed outcome could trigger a rally as the currency closes this 'misvaluation' gap, even if short-term rates don't reprice significantly. This suggests the dollar has a valuation-based tailwind independent of immediate policy moves.
Analysis of the last five US Federal Reserve hiking cycles reveals a consistent pattern: the dollar appreciates by 4-5% in the window from six months before to one month after the first rate hike. This historical precedent provides a specific timeline and magnitude for anticipating future dollar strength.
Even if Sweden's Riksbank delivers a hawkish surprise, its impact on the Swedish Krona (stocky) could be minimal. The US Fed decision on the same day holds more potential to move the currency, given the Krona's correlation with US yields and the broader unsupportive global environment for low-carry currencies.