Forex
Yen clings on to gains ahead of key BOJ decision; dollar slips
© Reuters. FILE PHOTO: Japanese Yen and U.S. dollar banknotes are seen in this illustration taken March 10, 2023. REUTERS/Dado Ruvic/Illustration/File Photo
By Amanda Cooper
LONDON (Reuters) -The yen retreated on Monday, but held near its recent highs, as the Bank of Japan (BOJ) kicked off a two-day meeting that could be crucial in determining the timing of the end of the central bank’s ultra-loose stance on interest rates.
The recent burst of risk appetite has given the Australian and New Zealand dollars in particular a leg up, with both nudging towards five-month highs on Monday.
The U.S. dollar extended last week’s fall following the Federal Reserve’s signal of the possibility of interest rate cuts next year. There was little reaction on Monday in the currency market to the escalating attacks by Iran-aligned Houthi militant groups on vessels in the Red Sea.
The yen lost ground, allowing the dollar to rise 0.4% to 142.76. The yen rose nearly 2% last week.
The Japanese currency has had a volatile few weeks, as markets struggle to get a grip on how soon the BOJ could phase out its negative interest rate policy, with comments from Governor Kazuo Ueda this month initially sparking a huge rally in the yen.
That was later reversed on news that a policy shift was unlikely to come as early as December, and investors now await Tuesday’s BOJ decision for further clarity on the bank’s rate outlook.
In any case, since hitting a multi-decade low against the dollar near 152 in November, the yen has gained around 6% in value as traders have grown increasingly convinced the BOJ’s low-rates drag on the currency will not last much longer.
“This shift in sentiment will no doubt be welcomed by the Bank of Japan and to some extent helps them out with respect to the weakness of the yen ahead of tomorrow’s rate decision,” CMC markets strategist Michael Hewson said.
“There is now less incentive for them to think about altering their current policy settings, although they might hint at starting to execute some form of shift early next year.”
Against the euro, the yen edged down 0.5% to 155.74, but still held near this month’s four-month high of 153.215 per euro.
Highlighting the degree of anticipation around the BOJ meeting was a jump in overnight volatility in the yen to its highest since July.
RISK ON
Elsewhere, the Australian and New Zealand dollars, which can often act as barometers for investor risk appetite in the currency market, traded near their highest in five months.
The was 0.4% higher at $0.6729, having touched its highest since late July earlier in the day, while the rose 0.4% to $0.6233.
The prospect of the Fed lowering rates early next year kept the mood buoyant across markets. Futures show a roughly 75% chance that the first cut could come as early as March, according to the CME FedWatch tool.
The dollar is now facing its first yearly loss against a basket of major currencies since 2020, as the boost from the Fed’s steep U.S. rate hikes and “higher for longer” messaging has now faded.
The was last down 0.12% at 102.44, having lost 1.3% last week.
The European Central Bank (ECB) and Bank of England (BoE) likewise kept interest rates steady at their respective policy meetings last week, although unlike the Fed, both pushed back against expectations of imminent rate cuts.
“This divergence is particularly notable given the euro zone’s recent weaker economic performance and more rapid disinflation compared to the U.S. Meanwhile, the (BoE) maintains a cautious stance, showing no indication of deviating from its ‘higher-for-longer’ policy,” said Monica Defend, head of Amundi Investment Institute.
Sterling eased 0.2% to $1.2657, while the euro rose 0.2% to $1.0912.
The euro, however, remains hobbled by a gloomy outlook for growth in the euro zone, with data last week showing a downturn in the bloc’s business activity deepened more than expected in December, indicating the economy is likely in recession.
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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