Bridget Riley
TOKYO (Reuters) – The dollar and yen traded within a narrow range on Tuesday as traders awaited a string of major central bank decisions, starting with midweek monetary policy meetings by the Bank of Japan and the U.S. Federal Reserve.
The Japanese yen, which surged more than 2 percent against the dollar last week, was taking a breather from recent gains as the Bank of Japan begins a two-day meeting on Tuesday.
A combination of factors, including a global stock market crash and expectations for monetary policy, has led to the yen strengthening from a 38-year low of 161.96 yen to the dollar recorded earlier this month.
The Bank of Japan has already announced that it will unveil a quantitative tightening (QT) plan, with a middle-of-the-road view that the bank will gradually halve its monthly bond purchases over a two-year period.
But doubts remain about whether the Bank of Japan will raise interest rates for the second time this year on Wednesday, with analysts pointing to the central bank’s track record of disappointing hawkish market expectations.
“Given that the BOJ’s rate hikes at recent meetings have tended to be weaker than expected and hike expectations are quite high, the real risk for the BOJ is that no hike will be made and the yen will weaken,” said Matt Simpson, senior market analyst at City Index.
The market is currently pricing in a 63% chance of a 10bps rate hike.
The dollar rose 0.12% against the yen to 154.205.
An index comparing the currency to a basket of major currencies was little changed at 104.64.
The Fed is widely expected to keep rates on hold this week, but markets expect the US central bank to start cutting rates at its next meeting in September.
Investors will be watching to see whether Fed Chairman Jerome Powell gives any hints at a news conference about how quickly policymakers are prepared to cut rates.
The Fed does not meet in August, but Chairman Powell could use a meeting of central bank governors in Jackson Hole in late August to prepare markets for a rate cut and give policymakers time to assess economic data.
That includes Friday’s July jobs report, and Fed officials are increasingly focused on the harm that can befall the labor market if borrowing costs continue to outpace inflation for too long.
But failing to clearly signal a September rate cut this week could lead to higher Treasury yields and the dollar, City Index’s Simpson said.
Meanwhile, the Bank of England’s first interest rate cut since 2020 is in doubt amid growing uncertainty after key policymakers have not spoken publicly for more than two months due to rules in the run-up to the July 4 general election.
The pound was down 0.08% from the previous day, closing at $1.28495, while the euro was little changed at $1.0816.
Meanwhile, the Australian dollar fell 0.05% against the US dollar to $0.6546.
It was little changed at $0.5876. Among cryptocurrencies, Bitcoin was down 0.77% to $66,843.53.
