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Head of Japanese central bank calls sharp weakening of the yen undesirable

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The Bank of Japan raised its inflation forecast at Thursday’s meeting, but left its extremely low interest rates unchanged and warned of risks to the outlook for the economy. That means it will remain the black sheep among key central banks tightening monetary policy.

The BoJ lowered its GDP growth forecast and raised its inflation forecast. As expected, the Bank of Japan left the short-term interest rate at -0.1% and the yield target for 10-year government bonds at about 0%. Eight of the nine board members voted in favor of the decision.

The bank also raised its core inflation forecast for the current fiscal year ending March 2023 to 2.3% from 1.9% and for the next fiscal year to 1.4% from 1.1%. The bank lowered its GDP growth forecast for this fiscal year to 2.4% from 2.9%.

“It’s important that companies, whose profits have risen because of the weakening yen, increase capital investment and raise wages. This will reinforce the positive cycle in which rising profits lead to higher spending. With the rapid exchange rate changes that we are witnessing now, companies may be wary of making capital investments. Therefore a sharp weakening of the yen is undesirable. We will work closely with the government to monitor closely the dynamics of currencies and their impact on the economy,” said Bank of Japan Governor Haruhiko Kuroda at a press conference following the meeting.

Japan revealed the “disastrous” consequences of the sanctions battle.

“We expect companies to continue to pass on (rising) costs to consumers…It should be noted that short-term inflation expectations have strengthened quite noticeably, and they are also strengthening over the medium and long term. Nevertheless, we do not expect core inflation to reach 2% immediately,” he added.

“We have no plans to raise bond yield targets. Nor do we plan to widen the range of deviations from target yield levels. The economy is in the middle of a recovery from the effects of the pandemic. Japan’s deteriorating terms of trade are also draining profits, adding to the pressure on the economy. Therefore, we must continue to pursue a loose monetary policy to ensure that corporate profits rise to moderate wage and price growth,” Kuroda summarized. 


Forex

Dollar hands back gains after Israeli strike; weekly gains likely

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Investing.com – The U.S. dollar handed back early gains Wednesday in volatile action, as traders digested the reported Israeli strikes against Iranian sites and the impact on risk appetite.

At 05:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 105.870, having earlier climbed as high as 106.190, just marginally below the five-month peak of 106.51 seen earlier in the week. 

Dollar hands back gains after Israeli strikes

The safe-haven dollar jumped higher earlier Friday following reports that Israel attacked Iran in an escalation of conflict in the Middle East, just a few days after Iran launched a drone strike on Israel.

This move marks a potential escalation in the Iran-Israel conflict, and could herald worsening geopolitical conditions in the Middle East, especially after initial reports showed strikes near locations holding Iranian nuclear facilities.

However, these gains have since dissipated after Iranian news agencies said there was no damage to the facilities, and the strikes have been seen to be rather limited in size. 

That said, the dollar is still likely to post a positive week as strong U.S. economic data and persistent inflation have prompted investors to drastically rethink the chances of the Federal Reserve cutting rates any time soon. 

A slew of hawkish comments from Fed officials have also helped the greenback, as evidenced by Atlanta Federal Reserve Bank President on Thursday saying that if inflation does not continue to move toward the U.S. central bank’s 2% goal, central bankers would need to consider an interest-rate hike.     

Sterling edges higher despite weak UK retail sales

In Europe, rose 0.1% to 1.0648, after fell less than expected in March, decreasing by 2.9% on the year, compared with a forecast 3.2% decline.

Additionally, Reuters reported the German government will raise its growth forecast for the German economy this year to 0.3%, from a previous forecast of 0.2%.

However, any euro strength may well be temporary with the now expected to cut interest rates before the Federal Reserve in an attempt to give the region’s struggling economies a boost.

climbed 0.1% higher to 1.2445, trading just above five-month lows despite British stagnating in March.

Sales volumes showed no growth last month, below the expected 0.3% increase, representing the first time that they have not grown in monthly terms since December.

Weakness in retail spending makes it more likely the will start cutting interest rates in the summer, probably before the Federal Reserve.

Yen boosted by safe-haven status

In Asia, traded 0.1% lower at 154.47, with the safe-haven yen boosted by the elevated tensions in the Middle East. 

The Japanese currency remained near 34-year lows, prompting caution over possible government intervention.

edged 0.1% higher to 7.2417, with the yuan near five-month highs amid uncertainty over the Chinese economy.

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Japan’s finance minister gives fresh warning on excessive yen moves

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WASHINGTON (Reuters) – Japanese Finance Minister Shunichi Suzuki said on Friday authorities would take appropriate action against excessive currency market moves, repeating his warning to investors against pushing down the yen too much.

There has been growing market interest in the timing and pace of a pivot by the U.S. and European central banks toward less restrictive monetary policy, Suzuki said.

“Uncertainty and market speculation over these developments have heightened volatility in financial markets, including foreign exchange markets,” Suzuki said in a statement to the International Monetary Fund’s steering committee.

“It is important that foreign exchange rates move stably, reflecting fundamentals, and excessive volatility is not desirable. We would take appropriate actions against excessive movements,” he said during the spring meetings of the International Monetary Fund and World Bank in Washington.

© Reuters. FILE PHOTO: Japanese Finance Minister Shunichi Suzuki speaks during an event about expanding health coverage for all during the IMF and World Bank’s 2024 annual Spring Meetings in Washington, U.S., April 18, 2024. REUTERS/Ken Cedeno/File Photo

A broad dollar rally driven by receding market expectations of a near-term U.S. interest rate cut has recently pushed the yen to a 34-year low, heightening the chance of currency intervention by Japanese authorities.

The U.S., Japan and South Korea agreed to “consult closely” on foreign exchange markets in their first trilateral finance dialogue on Wednesday, acknowledging concerns from Tokyo and Seoul over their currencies’ recent sharp declines.

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BofA lowers EURUSD year-end forecast to 1.12 amid Fed policy shift

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On Friday, Bank of America (BofA) revised its forecast for the currency pair, now expecting it to reach 1.12 by the end of the year, down from the previously anticipated 1.15.

The adjustment follows a change in the Federal Reserve’s interest rate policy, with the first cut now expected in December rather than June. BofA cited potential risks from the absence of Fed cuts and fluctuating oil prices.

The firm also highlighted the impact of escalating geopolitical tensions, rising oil prices, and persistently high U.S. interest rates on emerging markets (EM). These factors have been identified as significant challenges, prompting BofA to revise its forecasts for the exchange rate as well.

The bank now predicts the USD/JPY will climb to 155 by the end of 2024 and 147 by the end of 2025, which is an upward revision based on the latest Federal Reserve forecast adjustments.

BofA has also shifted its stance on the USD/JPY from a slightly short position to buying, indicating a change in their trading strategy. The firm noted that most of their positions are light, suggesting a cautious approach to currency trading at the moment.

In the broader context of currency market dynamics, BofA stated that a stronger U.S. dollar would likely depend more on real money movements rather than speculative trades. This perspective takes into account the actual flow of funds by institutional investors as opposed to short-term bets made by traders.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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