By Brigid Riley
TOKYO (Reuters) – The dollar and yen remained within close range on Tuesday as traders awaited key decisions from the central bank. They started with midweek monetary policy meetings of the Bank of Japan and the Federal Reserve, which could set the tone for the weeks ahead.
The Japanese currency took a breather from its recent rally as the BOJ began its two-day meeting on Tuesday, after rising more than 2% against the dollar last week.
A slew of factors have collided to help the yen strengthen from a 38-year low of 161.96 against the dollar at the start of the month, including a global stock market rout and heightened expectations for Japan’s central bank to raise interest rates this week.
Markets are currently pricing in a 63% chance of a 10 bp rise.
The BOJ has already said it will announce quantitative tightening (QT) plans, calling for the middle-of-the-road bank to gradually halve its monthly bond purchases over two years.
But questions remain about whether the BOJ will raise rates on Wednesday amid tepid economic growth.
“The BOJ’s real risk is no rate hike and a weaker yen, given their tendency to undershoot expectations at recent meetings and hopes for a rate hike that are quite high,” said Matt Simpson, senior market analyst at City Index.
The dollar was 0.08% higher against the yen, fetching 154.125.
If the BOJ skips a rate hike, the dollar is likely to find near-term support around current levels against the yen, said Andy Ji, senior Asia FX strategist at InTouch Capital Markets.
While expectations of narrowing interest rate differentials have helped take pressure off the yen, Ji said the still large yield differential between the U.S. and Japan is “another reason the yen’s rally will face more resistance.”
The Fed is widely expected to remain firm on Wednesday, although markets are betting the US central bank will cut rates at its next meeting in September.
Investors will be listening at his news conference for any clues Fed Chairman Jerome Powell might come up with on how quickly policymakers are willing to cut rates.
Although the Fed will not meet in August, Powell could also use the meeting of central bankers in Jackson Hole later this month to prepare the market for a rate cut, giving policymakers more time to assess economic data.
That includes Friday’s July employment report, in which Fed officials increasingly focus on the potential damage to the labor market if they keep borrowing costs above inflation for too long.
But the lack of a clear signal of a September rate cut this week could lead to a strengthening of US Treasury yields and the dollar, City Index’s Simpson said.
The , which measures the currency against a basket of peers, was little changed at 104.56.
Meanwhile, the Bank of England’s first rate cut since 2020 remains in jeopardy amid increased uncertainty as key policymakers have not spoken publicly for more than two months due to rules ahead of the July 4 election.
Sterling last traded at $1.2857, down 0.02% on the day. The euro rose 0.05% to $1.0824.
Elsewhere, the Australian dollar rose 0.09% against the greenback to $0.65555, ahead of a key inflation report due on Wednesday that could make or break the case for another rise from the Reserve Bank of Australia.
The stock rose 0.27% to $0.58915, leaving Monday’s multi-month low.
In cryptocurrencies, bitcoin fell 1.08% to $66,634.87.
