Australian Dollar Soars While Japanese Yen Falls as Interest Rate Shifts Drive February

Currency markets saw significant movement in February as the Australian dollar climbed toward another monthly gain while the Japanese yen declined. The shifts were primarily driven by changing expectations about which central banks will raise interest rates this year.

Currency markets experienced major fluctuations in February as shifting interest rate expectations dominated trading, with the Australian dollar climbing while the Japanese yen weakened significantly.

Despite broader market volatility caused by geopolitical tensions, a key U.S. Supreme Court decision on Trump’s tariffs, and uncertainty in artificial intelligence investments, currency movements were primarily influenced by changing rate forecasts.

“The rates are reflecting the changing macro situation,” said Sim Moh Siong, a currency strategist at OCBC.

“Last year was about which central banks will cut rates and by how much. This year, the focus has shifted towards which central banks will lead in terms of hiking rates.”

The Australian dollar held steady at $0.7106 on Friday and appeared set for approximately a 2% monthly increase. Having risen more than 6% year-to-date, Australia’s currency leads all G10 currencies as the nation’s robust economy continues driving expectations for a more aggressive Reserve Bank of Australia.

“It is conceivable that the Aussie dollar can put on one or two more (U.S.) cents from here,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia.

“We are still of the view that there will be just one more 25-basis-point rate hike from the RBA this year.”

Japan’s central bank also appears positioned to raise rates, though this hasn’t benefited the yen as domestic political developments complicate the outlook, despite Bank of Japan Governor Kazuo Ueda indicating potential for near-term increases.

The yen gained 0.2% to 155.78 in Asian trading but remained down 0.4% for the week and 0.6% for the month.

Japan’s government this week appointed two academics viewed by markets as strong supporters of economic stimulus to the BOJ’s board. This unexpected decision signals Prime Minister Sanae Takaichi’s opposition to higher interest rates, raising questions about future policy tightening.

“Ueda flagging a possible March/April hike did little to support the yen because the guidance remains conditional on incoming data, and the political optics around appointments make markets question the pace and conviction of policy normalisation,” said Saxo’s chief investment strategist Charu Chanana.

The British pound remained flat at $1.3484, positioned to end three consecutive months of gains with a 1.5% February decline. Sterling has been weakened by dovish signals from the Bank of England, with traders now pricing an 83% probability of a March rate cut.

Meanwhile, the dollar was set for a 0.6% monthly gain, supported by a slightly more hawkish Federal Reserve after “several” policymakers expressed openness to rate hikes if inflation stays elevated during January’s meeting.

However, investors continue expecting two additional Fed cuts this year.

“I think because there’s still lingering concerns about what the Fed would be like under new Fed Chair Kevin Warsh,” said OCBC’s Sim.

The Supreme Court’s decision overturning Trump’s tariffs also strengthened checks on presidential authority, providing dollar support, analysts noted.

“It suggests that the long-term prospects for the U.S. dollar might not be as grim as previously imagined,” said Macquarie Group’s FX and rates strategist Gareth Berry.

Euro movements remained subdued, with the common currency unchanged at $1.1796 Friday and heading for a monthly decline just above 0.4%. The European Central Bank is expected to maintain current rates for the foreseeable future.

China’s central bank announced Friday it would eliminate foreign exchange risk reserves for certain forward contracts, reducing dollar purchasing costs. This follows the yuan’s 4.4% climb against the dollar in 2025, its largest annual increase since 2020.

The offshore yuan declined 0.2% to 6.8585 per dollar ahead of onshore trading.