The dollar sees its biggest drop in two months, but analysts urge against selling.

According to Zhongtong Finance, previously, due to the unexpectedly strong US economy, speculation arose that the Federal Reserve would maintain higher interest rates than other countries, leading to one of the longest-lasting rebounds of the US dollar in years. However, on Monday, the US dollar experienced its largest decline in two months as the Japanese authorities expressed their willingness to take measures to support their domestic currency, leading to a significant appreciation of the yen and suppressing the US dollar. Despite a slight retreat on Monday, analysts expect interest rate differentials to continue to put upward pressure on the US dollar and caution investors against shorting the US dollar.

Win Thin, Global Head of Currency Strategy at Brown Brothers Harriman & Co., said, "As long as there are differences in monetary policies, the US dollar will continue to strengthen. Calls for intervention may cause temporary adjustments, but they will not lead to any trend changes."

However, these remarks had an immediate impact on Monday, as traders weighed which measures Japan might take to prevent further depreciation of its currency. After Bank of Japan Governor Haruhiko Kuroda suggested the possibility of ending Japan's negative interest rate policy, the yield on 10-year Japanese government bonds rose to its highest level since 2014, pushing the yen against the US dollar up by 1.3% to 145.91 yen per dollar, reaching its highest level in two months.

Meanwhile, the Chinese monetary authorities also sent a strong signal to boost the renminbi, which climbed 1.2% in onshore trading. Chinese economic data confirmed that credit demand is improving, which also boosted investor confidence in the renminbi.

These measures pushed the Bloomberg Dollar Spot Index down more than 0.6%, ending eight consecutive weeks of gains, the longest continuous rise since the index was established in 2005. All 16 major currencies tracked by Bloomberg against the US dollar rose.

However, the US dollar index is still not far from its peak this year, and the divergent economic prospects that have driven the appreciation of the US dollar still exist. The US dollar has been rising against major currencies due to market expectations that the Federal Reserve will maintain high interest rates to prevent inflation from rising again, contrary to the previously gloomy expectations. While interest rates in major Asian and European countries are already low, the divergence prompted speculators to shift funds to the United States for higher returns as signs of economic slowdown emerged in Asia and Europe.

Any short-term trend in the US dollar could also be reversed by the release of the Consumer Price Index (CPI) on Wednesday, which could prompt the Federal Reserve to reconsider its policy direction. Thin said, "It is dangerous to short the US dollar before the big sell-off in data this week."

Even those who are optimistic about the yen in the medium term advise caution. UBS Global Wealth Management predicts that if the USD/JPY exchange rate breaks through 146, it will fall back to 142 by the end of the year. But the company suggests that investors focus on the rise of the yen against the euro or pound, rather than the dollar, as inflation data and the Fed's decision on September 20 may lead to volatility in the dollar. In a report on Monday, the company stated, "We do not recommend adding long positions in yen against the dollar at this time."

In addition, data shows an improvement in credit demand, which helped drive the rebound of the renminbi on Monday. Tiffany Wang, a strategist at Morgan Stanley in Hong Kong, believes that there is further room for the renminbi to appreciate against the dollar, partly due to short covering. However, she stated in a report to clients that the threshold for a trend reversal "appears to be high."