Break on Through

The dollar is likely to retain upside support from the US growth advantage, but tighter policy elsewhere should limit the prospect of new cyclical highs.

• The US dollar is advancing mainly because of the yen’s slump, while more hawkish central banks are lifting long-term yields and weighing on equities despite lower crude prices.
• The September S&P Global PMIs are expected to show that US growth remains ahead of the Eurozone, the UK and Japan; US August industrial production and speeches by Jeff Schmid and Michelle Bowman are also due.
• The BOJ raised its policy rate by 25 basis points to 1.25% with a 7-2 vote, but projected underlying inflation to reach 2% only between the second half of fiscal 2026 and fiscal 2027.
• USD/JPY rose nearly two big figures to 158.00 after the BOJ decision, with resistance at 158.42 and 160.00; intervention risk should increase near 160.00.
• UK August retail sales rose 0.5% month over month after falling 0.5% in July, lifting the implied probability of a 25-basis-point BOE hike in November from 83% to 90%; however, BBH considers the market’s expectation of roughly 100 basis points of hikes over twelve months excessive.

Takeaway: BBH favors upside risks for the dollar against the yen and sees sterling vulnerable to a dovish repricing of BOE expectations, while warning that FX intervention could constrain a yen overshoot and that policy convergence limits the dollar’s longer-term upside.