The US Dollar (USD) gained strength against both the Japanese Yen (JPY) and the Canadian Dollar (CAD) during early Asian trading hours on Wednesday, as market participants awaited the release of the Federal Open Market Committee (FOMC) Minutes later in the day [1][2]. The USD/JPY pair rose to around 158.35, driven by receding expectations for a near-term rate hike by the Bank of Japan (BoJ). Market pricing in overnight index swaps now implies only a 12% chance of a BoJ rate hike this month, down from 40% early last week, though the probability increases to 90% for the December meeting [1]. BoJ Governor Kazuo Ueda reiterated that the central bank would assess economic and price outlook risks before deciding on the pace and timing of future rate hikes, while new policymaker Ayano Sato expressed support for raising rates in several stages [1]. Analysts at Rabobank noted that back-to-back BoJ rate hikes are unlikely, with market expectations centering on December for the next move [1].
Meanwhile, the USD/CAD pair edged higher, trading just above the 1.4200 mark, up 0.05% for the day, as the USD attracted dip-buyers following a recent profit-taking slide [2]. The Canadian Dollar's losses were limited by recovering crude oil prices, which rebounded from a one-month low amid heightened geopolitical tensions in the Middle East. The Saudi-backed Yemeni government claimed control over strategic points along the Red Sea coast, while the Iran-backed Houthi group retaliated with attacks on Saudi targets, including an Aramco refinery in Riyadh. Iran also increased its attacks in the Strait of Hormuz over the past week, maintaining a geopolitical risk premium on oil prices [2].
On the monetary policy front, the Bank of Canada (BoC) is seen as having less reason to raise interest rates than the US Federal Reserve (Fed), given Canada's weaker economic outlook and contained inflationary pressures [2]. Traders are currently pricing in an 85% chance that the Fed will raise borrowing costs by the end of the year, though market participants are awaiting the FOMC Minutes for further guidance [2]. Technical analysis of USD/CAD suggests strong upside momentum, with the pair trading above all visible Fibonacci retracement levels and initial support at 1.4163 [2].
Rabobank analysts maintain a 3-month USD/JPY target of 155.00, suggesting that while the pair has moved higher since the September policy meeting, expectations for further Fed tightening may be overdone, potentially leading to a lower USD/JPY into 2027 if Fed rate hike risks are priced out [1].
CONCLUSION
The US Dollar's recent strength is underpinned by diverging monetary policy expectations, with the BoJ and BoC both seen as less likely to raise rates in the near term compared to the Fed. Market participants are closely watching the upcoming FOMC Minutes for further direction, while geopolitical tensions and oil price movements continue to influence the Canadian Dollar. The overall market sentiment remains cautiously bullish for the USD in the short term.