(Aug 3): The dollar extended its slide on Monday as a joint US-Japan intervention to support the yen added to losses triggered by last week’s Federal Reserve meeting.

Bloomberg’s Dollar Spot Index traded at a one-month low earlier in the day, losing 0.5% against Group-of-10 currencies. It later recouped most of those losses to trade 0.1% lower as of 11:20am in London. 

Meanwhile the yen rallied off four-decade lows after the US and Japan took coordinated action to defend it. Treasury Secretary Scott Bessent has vowed the US “will not hesitate” to wade back into the market, confirming Tokyo has a powerful partner in its bid to stem excessive currency weakness. The greenback was down 0.3% versus the yen. 

But its latest bout of weakness can be traced to last week when the Fed opted to keep interest rates on hold, raising question marks over new chairman Kevin Warsh’s inflation-fighting credentials. The dollar index shed 1.3% last week. 

“It all started after that Fed meeting,” said Francesco Pesole, an FX strategist at ING. “Markets were quite long the dollar. If you look at positioning gauges, short-term investors were aggressively long dollars across the board.”

Bullish dollar wagers were at the highest since 2014 ahead of the July 28-29 Fed meeting, data showed late Friday.

To avoid pressuring the greenback further, the Treasury may have used euros rather than dollars to fund its yen purchases, strategists said. The euro has weakened against most of its Group-of-10 peers since Japan began its recent bout of intervention on July 30. 

Many traders will be mulling whether to embrace a structural short position on the dollar, according to Pesole. He says, however, that yen intervention is a temporary fix and the Fed is what will determine the dollar’s trajectory. 

Money markets are pricing in an almost 70% chance of an interest-rate increase next month, with a full increase expected by year-end. Jefferies strategist Mohit Kumar said without a sharp oil-price drop, failure to act on inflation will undermine Warsh’s credibility.  

“Beyond intervention, I see fundamentals as still negative for the yen and positive for dollar,” Kumar said. “There would be increasing pressure on the Fed to hike.”

Uploaded by Evelyn Chan