The DBS Equilibrium Exchange Rates (or DEER) indicate fair values for global currencies relative to a trade-weighted currency basket.

The Japanese yen's (JPY) undervaluation has narrowed from record levels following Japan's second FX market intervention this year, which was conducted in co-ordination with the US. Co-ordinated FX intervention between the US and Japan is rare, with the last joint intervention occuring 15 years ago to weaken an excessively over-valued JPY in the aftermath of the 2011 Tohoku earthquake. US Treasury Secretary Bessent has argued that US participation could help stabilize Asian currencies that may otherwise face depreciation pressures stemming from JPY weakness. Indeed, both the KRW and RMB are quite undervalued according to our DEER model, and so interventions to limit JPY weakness also help alleviate unwanted selling pressure on regional currencies. US participation further strengthens the credibility of Japanese authorities' actions, potentially reducing the scale of FX intervention and associated asset sales that could otherwise contribute to heightened volatility in the US Treasury market. Furthermore, US support may reflect expectations of JPY gains, potentially informed by US Treasury Secretary Bessent's regular dialogue with Japanese policymakers and his insight into Japan's policy deliberations.

The US dollar (USD) remains significantly over-valued, supported by elevated oil prices and ongoing uncertainty surrounding the Strait of Hormuz. Nevertheless, Iran and Oman are engaged in negotiations, which could yield a deal that facilitates a gradual normalization of shipping activity through the Strait, contributing to a moderation in oil prices and reducing support for the USD. At the same time, expectations of a Fed rate hike this year have diminished following weaker-than-expected non-farm payrolls data for July, which showed a decline of 23,000 jobs, alongside substantial downward revisions to prior months'employment figures. Together, these developments could support a further narrowing of the USD's overvaluation.