Yen nurses losses as BOJ meets, dollar dogged by rate outlook

SYDNEY – The yen remained under pressure on Friday as investors wagered the Bank of Japan (BOJ) would wrap up a policy meeting sounding cautious on further tightening, while the US dollar had its own problems as markets priced in more rapid US rate cuts.

It has been a tough week for the yen, with the euro gaining 2.2% to 159.46 as speculators booked profit on recent long yen positions.

The euro also firmed to USD 1.1160, up 0.8% for the week and within striking distance of the August peak of USD 1.1201. A break there would target a July 2023 top of USD 1.1275.

The dollar was up 1.4% for the week at 142.84 yen, though off an overnight high of 143.95. Resistance was at 144,20, while support lay at the recent trough of 139.58.

The BOJ is widely expected to hold its policy interest rate at 0.25% later on Friday and maintain its view the economy will recover moderately as rising wages underpin consumption.

Data on consumer prices out on Friday showed core inflation ticked up to 2.8% in August, while overall inflation hit 3.0%.

Samara Hammoud, a currency strategist at CBA, noted Japan’s real rate remained deeply negative at about -2.5%, while the BOJ estimated neutral to be in a range of -1% to 0.5%.

“As such, there is scope to further raise the policy rate while keeping financial conditions accommodative,” she said. “Our base case remains for the BOJ to next raise rates by 25bp in October, though the risk leans towards a later hike.”

“The recent financial market ructions and the upcoming Liberal Democratic Party election may make the BOJ more cautious about raising.”

The BOJ’s policy statements can sometimes be rather opaque, so investors will be focused on any hints from Governor Kazuo Ueda on the timing and pace of tightening at his post-meeting news conference.

DOLLAR DECLINE

Much of the rest of the world is heading in the other direction, with markets expecting China’s central bank to trim its longer-term prime rates by 5-10 basis points on Friday.

China has also been hinting at other stimulus measures, enabled in part by the US Federal Reserve’s aggressive easing which shoved the dollar to a 16-month low on the yuan.

Markets imply a 40% chance the Fed will cut by another 50 basis points in November and have 73 basis points priced in by year-end. Rates are seen at 2.85% by the end of 2025, which is now thought to be the Fed’s estimate of neutral.

That dovish outlook has bolstered hopes for continued US economic growth and sparked a major rally in risk assets. Currencies leveraged to global growth and commodity prices also benefited, with the Aussie topping USD 0.6800.

The US dollar index was stuck at 100.69 and just above a one-year low.

Sterling was another gainer after the Bank of England kept rates unchanged on Thursday, while its governor said it had to be “careful not to cut too fast or by too much”.

The pound was up 1.1% for the week so far at USD 1.3276, having hit its highest since March 2022.

(Reporting by Wayne Cole; Editing by Christopher Cushing)