FOREX-Yen choppy after BOJ stays dovish; dollar loses steam

The yen wobbled after the Bank of Japan on Friday kept interest rates ultra low and maintained a dovish stance, while the dollar struggled to hold onto overnight gains due to expectations that the Federal Reserve could shift to smaller interest rate rises.

The yen fell about 0.4% to a session low of 146.90 per dollar after the BOJ’s decision, but later reversed the losses to eke out a marginal gain. It last stood at 146.265 per dollar. As widely expected, the BOJ left unchanged its -0.1% target for short-term interest rates and its pledge to guide the 10-year bond yield around 0%, though it revised up its price forecasts through 2024.

“The choppy price action suggests that markets were hoping for a tweak in BOJ’s policies and also reflects the upward revision to the core CPI forecast,” said Christopher Wong, a currency strategist at OCBC. “But it was quite clear that BOJ officials have already said there is no compelling evidence to show prices and wage growth are rising in a sustainable manner.”

Elsewhere, the dollar extended this week’s decline, with the U.S. dollar index headed for a weekly loss. Against the weaker greenback, the euro attempted to break above parity after tumbling overnight, while the kiwi rose to a more than one-month high.

While expectations are still for a 75 basis point rate hike at next week’s FOMC meeting, the Fed is seen slowing its aggressive rate-hike pace in December. As it is, the Bank of Canada announced a smaller-than-expected interest rate hike this week, and the European Central Bank was seen taking a more dovish tone on its rate outlook.

“But I think the Fed is in a different position. It’s slightly more difficult for the Fed to join the pivot party, because the inflation problem is more persistent there, so I expect a bit of pushback from the Fed, and that’s probably going to benefit the dollar,” said Moh Siong Sim, a currency strategist at Bank of Singapore. After rising as high as $0.9998, the euro was last up 0.19% at $0.9984.

It had fallen more than 1% in the previous session and slid back below parity against the dollar after the ECB raised rates by 75 bp, as expected, but hinted at a less aggressive pace of rate hikes subsequently. The ECB dropped a reference to increasing rates “over the next several meetings” that had been in its September statement, which traders interpreted as a signal that a series of large rate hikes was nearing an end.

“The ECB policy decisions were less hawkish than most had expected. Most of the surprise came, really, from the comments from Christine Lagarde saying that the ECB has already made substantial progress in withdrawing policy stimulus,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. The U.S. dollar index, which measures the greenback against a basket of currencies, was down 0.15% to 110.39 during Asian trading after straong gains overnight due largely to the euro’s weakness.

Sterling was up 0.04% at $1.1569, and was on track for a more than 2% weekly gain, on optimism that new British Prime Minister Rishi Sunak would offer an antidote to the mess left by his predecessor Liz Truss. The Aussie gained 0.11% to $0.6461, while the kiwi peaked at $0.5873, its highest in over a month, and was last up 0.52% at $0.5860.

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