© Reuters. FILE PHOTO: In this illustrative photo taken on September 23, 2022, Japanese yen and US dollar bills are seen. REUTERS/Florence Lo/File Photo
By Ankur Banerjee
SINGAPORE (Reuters) – The yen languished near a four-month low against the U.S. dollar and a 16-year low against the euro on Wednesday, as traders bet Japan's monetary setting will remain accommodative even as the central bank puts end its negative interest rate policy.
While the Bank of Japan on Tuesday ushered in the country's first rate hike in 17 years, the central bank said it expected to maintain accommodative conditions for the time being, keeping pressure on the yen as rate differentials between the United States and Japan continue to be marked.
On Wednesday, the yen weakened to a four-month low of 151.58 per dollar and last fell 0.47% to 151.56, with the multi-decade low of 151.94 in sight and the threat of intervention by the Japanese authorities resurfacing.
“I think the focus is back on the 152 levels,” said Christopher Wong, currency strategist at OCBC, adding that there was a good chance to see some softening if the dollar/yen continues to rise towards 152.
Wong said the dollar/yen movement in the near term will be more a function of US rates and the Federal Reserve's decision will be known later on Wednesday.
The yen's decline was widespread: the currency weakened to 164.66 against the euro, its lowest level since 2008, while against the pound, the yen fell to 192.75, its lowest level since 2015. Markets Japanese are closed on Wednesday for a holiday.
In a historic reversal after decades of massive monetary stimulus, Japan's central bank on Tuesday ended eight years of negative interest rates and other remnants of unorthodox economic policy.
The yen fell 1% against the dollar on Tuesday after the BOJ decision, as most investors had already priced in a change, with analysts suggesting the “moderate rise” cemented the view that the yen's carry trade yen was far from over.
Low Japanese rates have made the yen the preferred funding currency for carry trades, in which traders typically borrow a low-yielding currency and then sell and invest the proceeds in assets denominated in a higher-yielding currency. .
The Australian dollar hit a more than three-week high against the yen at 98.94, having gained 0.7% overnight.
“The carry trade against major currencies is still in play and is expected to continue for some time,” said Daniela Hathorn, senior market analyst at Capital.com. “This means the yen is likely to see further weakness, especially if other central banks continue to delay rate cuts.”
FEEDING DAY
The main focus of the day remains on the Federal Reserve and, although the central bank is not expected to act, its economic projections and comments from Chairman Jerome Powell will be the focus of attention.
Last week's stronger-than-expected inflation reports prompted traders to further reduce their bets on rate cuts this year, with markets now pricing in 73 basis points (bps) of easing this year. At the beginning of the year, operators were estimating cuts of 150 basis points.
Traders are pricing in a 59% chance that the Federal Reserve will begin its easing cycle in June, the CME FedWatch tool showed, well below previous expectations.
“Given the recent spike in inflation, the Fed's decision will be closely watched to see if there is a downward shift in the median projection of 3 to 2 cuts this year,” said Nicholas Chia, Asia macro strategist at Standard Chartered (OTC:) .
“If that happens, I think Powell will try to strike a dovish tone in his press conference to avoid further bearish slope of the US curve.”
The , which measures the US currency against six rivals, rose 0.039% to 103.90. The euro was last bought at $1.0866.
The dollar was little changed at $0.6528, while the New Zealand dollar was down 0.18% at $0.6042, a day after Australia's central bank kept interest rates steady as expected, while who diluted a restrictive bias by saying that he did not rule out anything inside or outside politics. .
In cryptocurrencies, bitcoin last fell 3.4% to $61,569, having hit a two-week low of $60,780 earlier in the session.
