Yen declines in light trading as traders remain cautious about intervention risks

Yen Weakens Despite Interest Rate Hike

NEW YORK, Dec 26 – The Japanese yen saw a decline against the dollar on Friday, as investors remained cautious about potential intervention to strengthen the currency. Meanwhile, the dollar edged up slightly against the euro, but trading was thin.

Even after the Bank of Japan’s recent interest rate hike, the yen has struggled due to apprehensions regarding Japan’s expansive fiscal strategy.

This Friday, Japan’s government revealed a proposal for unprecedented spending in the next fiscal year while limiting bond issuance. This move highlights Prime Minister Sanae Takaichi’s ongoing efforts to boost the economy, amidst inflation that remains above the central bank’s intended target.

Data released showed core consumer inflation in Tokyo slowed in December, largely due to falling food costs. Still, it stayed above the Bank of Japan’s 2% target, which seems to bolster the argument for additional rate increases.

Bank of Japan Governor Kazuo Ueda remarked on Thursday that underlying inflation is slowly increasing and moving towards the central bank’s target, affirming the bank’s readiness to continue raising interest rates.

However, recent warnings from Japanese officials about potential intervention have helped the yen recover from its lows. Finance Minister Satsuki Katayama stated on Tuesday that Japan is prepared to tackle excessive fluctuations in the yen’s value, signaling a strong warning about possible actions in the currency market to prevent further declines.

By the close of trading, the dollar gained 0.48% to stand at 156.54 against the yen. Just the previous Friday, it had peaked at 157.77.

The dollar index, which measures the US dollar against a selection of currencies including the yen and euro, increased by 0.01% to reach 98.04, while the euro dipped 0.04% to $1.1772. The British pound fell 0.22% to $1.3493.

This year, the dollar has weakened as investors anticipate further rate cuts from the U.S. Federal Reserve, while other central banks are expected to maintain current interest rates.

Federal Reserve officials find themselves balancing a softening labor market against inflation that continues to be above the central bank’s annual goal of 2%.

Traders in federal funds futures have started pricing in expectations for two to three rate cuts of 25 basis points each next year, with the first cut potentially occurring in March.