The foreign exchange market has started September with a clear focus on the US dollar, Japanese yen, interest rates and oil prices. On Tuesday, September 1, the dollar held a firm position as fresh tension in the Middle East pushed oil prices higher and raised fears about inflation. At the same time, the Japanese yen came close to a level that could bring another currency intervention from Japan.
The biggest story in the market is the USD/JPY pair. The yen traded near 160 per dollar and slipped past the 160 level for the third straight session. The yen was last near 159.99 per dollar in the Reuters market report. Earlier, it had traded below the 160 mark, but the yen has lost most of the benefit from the joint action by Japan and the United States at the end of July.
Yen Faces Fresh Pressure Near 160
The 160 level has special importance for the yen. Traders see this area as a possible point for another action by Japanese authorities. Japan and the United States have already taken rare joint action to support the yen. That move helped the yen recover from a 40-year low near 163.99, but the effect did not last.
US Treasury Secretary Scott Bessent has added fresh pressure on Japan. He said he believes the Japanese government and the Bank of Japan will take steps that lead to a stronger yen. Japanese Finance Minister Satsuki Katayama also said Japan and the United States remain ready to work together for orderly currency moves.
The Bank of Japan now faces a major policy test. Markets expect a rate hike in September. The key issue is whether one rate hike will be enough to support the yen. With US rates still high, the gap between US and Japanese rates remains wide. This gap makes the dollar more attractive to many traders.
Bank of Japan Faces More Pressure
Japan’s central bank is under pressure from both the currency market and higher prices at home. A weak yen raises the cost of imported goods because Japan buys a large amount of energy and other products from overseas.
The 10-year Japanese government bond yield reached 3% on September 1. This was the first time it reached that level in about 30 years. Higher bond yields show that the market expects more pressure on Japanese rates and public finances.
Markets see a strong chance of a Bank of Japan rate hike later this month. Reuters reported that markets were pricing a 73% chance of such a move. The BOJ policy meeting is due on September 17 and 18. The market focus will not only be on the next rate decision but also on the message from Governor Kazuo Ueda about future policy.
US Dollar Gets Support From Rate Bets
The dollar also has support from the Federal Reserve outlook. Traders have raised their expectations for a US rate hike this month after recent comments from Fed Chair Kevin Warsh.
The market now puts the chance of a September Fed rate hike at about 65%, compared with 41% one week earlier. This is a major shift in a short period. A higher US interest rate can support the dollar because it can make US assets more attractive to global investors.
The US dollar index stood near 99.623, up 0.2% in the latest Reuters report. The dollar has gained support from both rate expectations and its role as a safe currency during periods of market stress.
Still, the Fed has not promised a rate hike. The next set of US economic reports will matter a great deal. The market is especially focused on the US jobs report due on Friday. The data could change expectations for the Fed’s next move.
Oil Prices Add More Pressure
Oil has become another major force for the forex market today. Brent crude rose above $91 a barrel after fresh attacks linked to the Iran conflict. US President Donald Trump also threatened further strikes against Iran.
Higher oil prices can create a difficult situation for central banks. More expensive energy can push consumer prices higher. That can make it harder for central banks to reduce interest rates.
The rise in oil prices has also hurt some currencies more than others. Europe and Japan are more dependent on imported energy than the United States. This gives the dollar an extra advantage when oil prices rise and global risk increases.
US Bond Yields Rise Sharply
The bond market has also sent an important signal today. The 10-year US Treasury yield reached 4.78%, its highest level since early 2025. At the same time, the Japanese 10-year government bond yield reached 3%.
Higher bond yields can affect forex markets because they change the return investors can expect from different countries. The rise in US yields has helped keep the dollar firm, while Japan’s higher bond yield has not yet been enough to reverse the yen’s decline.
The move across global bond markets also shows that investors have become more concerned about inflation and future interest rates.
Euro Faces a Major Test
The euro has a different story today. EUR/USD stood near $1.1589 in the Reuters report, down about 0.2%. The pair comes under pressure from the stronger dollar, but the euro has its own support from a possible European Central Bank rate hike.
Eurozone inflation data is due today, and the result could have a major effect on the euro. Markets expect inflation to rise to 3.3% in August from 2.9% in July. A higher inflation figure could strengthen expectations for another ECB rate hike this month.
At the same time, the eurozone economy has shown some better signs. The eurozone manufacturing PMI rose to 52.7 in August from 51.9 in July. A figure above 50 shows growth. The latest result was the strongest factory growth in more than four years.
Germany also posted its strongest factory growth in more than four years. France added to the overall improvement, although Italy and Spain remained weaker.
Pound Holds Near $1.35
The British pound has also remained fairly firm after a positive August. Sterling stood near $1.3532 in the main Reuters report and later near $1.35424 in the updated market report. The pound rose about 0.5% last month.
For GBP/USD, the main pressure today comes from the strong US dollar and wider global rate concerns. The pound does have some support from its own interest-rate outlook, but the dollar remains the stronger force across much of the market.
Australian and New Zealand Dollars
The Australian dollar traded near $0.7152, while the New Zealand dollar stood near $0.5900. Both currencies had reached multi-month highs before the latest move.
The Australian dollar can receive support from stronger Chinese economic data because China is a major trading partner for Australia. However, global risk, oil prices and US rate expectations remain important for both AUD/USD and NZD/USD.
For now, these currencies have less strength than the dollar because the US market offers a stronger rate story.
What Matters Most for Forex Traders
The most important level in the market today remains 160 for USD/JPY. A sustained move above this level could increase concern about another Japanese intervention. At the same time, a sharp fall below 160 could show that traders have started to take the BOJ’s possible rate hike more seriously.
The dollar also has a strong base from the rise in US rate-hike expectations. The dollar index is near 99.623, while EUR/USD is near $1.1589 and GBP/USD is near $1.3532. USD/JPY is near 159.99, while AUD/USD is near $0.7152 and NZD/USD is near $0.5900.
The next major test will come from US economic data, especially Friday’s nonfarm payrolls report. A strong jobs report could raise the case for a Fed rate hike and give the dollar more support. A weak report could reduce those expectations and put pressure on the dollar.
Outlook for September 1
The forex market has entered September with several major forces at work. The dollar has support from higher US yields and stronger Fed rate-hike bets. The yen remains weak near 160, but the risk of Japanese action is high. The euro has a major test from today’s inflation report, while the pound remains near $1.35.
Oil above $91 has added another layer of risk because higher energy costs can keep inflation high. That could force central banks to keep rates higher for longer.
For now, the dollar has the stronger position, but the market remains very sensitive to fresh economic data and official comments. USD/JPY near 160 is the key forex level of the day. Any sharp move around this area could set the tone for the wider currency market through the rest of September 1.
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