SINGAPORE -- The U.S. dollar on the defensive on Thursday after the Federal Reserve opened the door for an interest rate cut in September, helping keep the yen pinned near its highest since March in the wake of a hawkish pivot from the Bank of Japan.

An action-packed Wednesday started with the BOJ raising Japan rates to levels not seen in 15 years, leading to traders reassessing popular carry trades before the Fed held rates steady but put rate cuts on the table as US inflation cools.

The yen was volatile in early trade, surging nearly one percent to 148.51 per dollar, its highest since mid-March before settling slightly stronger at 149.46.

"BOJ normalisation and Fed cut in due course represent a shift from Fed-BOJ policy divergence to convergence," said Christopher Wong, currency strategist at OCBC.

"Policy convergence should change the direction of travel for USDJPY to the downside. The risk here is that Fed doesn’t play ball," he said.

The BOJ also announced plans to halve its monthly Japanese government bond purchases as of January-March 2026, with Governor Kazuo Ueda not ruling out another hike this year.

The yen surged seven percent in July, its strongest monthly performance since November 2022, after starting the month rooted near 38 year lows in large part due to bouts interventions by Japanese authorities that totalled $36.8 billion.

Still, the currency is down 5.7 percent against the dollar this year due to the wide interest rate difference between Japan and the United States.

"The BOJ showed it will play its part and this should help stabilize the yen but much of the remaining wide yield differential would need to be closed by the Fed," said portfolio managers from the Multi Asset team at AllianzGI.

"In absence of Fed action, JPY shorts may begin to reemerge."

CFTC data shows speculators' bearish bets against the yen are 40 percent below April's near-seven year high, though at a still elevated $8.61 billion.

The dollar index , which measures the U.S. currency against six peers, was down 0.1 percent at 103.95, having dropped 0.38 percent on Wednesday. The index fell 1.7 percent in July, its weakest monthly performance this year.

The euro last fetched $1.0834 after rising one percent in July, while sterling was at $1.2852 ahead of the policy decision from the Bank of England, where the central bank could cut rates but markets and economists remain far from certain.

Dovish Fed

With the Fed staying data dependant, investor focus will be on Friday’s government jobs report for July. It is expected to show that employers added 175,000 jobs during the month, according to the median estimate of economists polled by Reuters. July inflation report will be the next key data and is due to be released on Aug. 14.

Markets have been fully pricing in a 25 basis points (bps) of rate cut in September for some time and added to wagers of the Fed going big even after Fed Chair Jerome Powell said policymakers are not thinking about a 50-basis-point interest rate cut "right now".

Traders are now anticipating 72 bps of easing this year.

"Markets have been expecting more rate cuts than what the Fed’s June dot plot showed going into yesterday’s announcement. And Chair Powell did not seem to provide any opposition to that view," said Charu Chanana, head of currency strategy for Saxo.

"This has bolstered market expectations that bigger rate cuts remain likely, and will be heavily influenced by how the economy progresses from here."

In other currencies, the Australian dollar was little changed at $0.6531 after sliding two percent in July, while the New Zealand dollar last fetched $0.5954.