The Japanese yen found some stability on Tuesday, trading on the stronger side of 155 per dollar, as the U.S. dollar retreated from its recent highs. The respite follows a remarkable rally by the greenback, which reached a one-year peak, prompting profit-taking by traders. The yen edged up 0.2%, settling at 154.40 per dollar, recovering from Monday’s dip when Bank of Japan (BOJ) Governor Kazuo Ueda offered no fresh insights on potential rate hikes in December.
Governor Ueda maintained his steady approach, disappointing market participants hoping for hawkish signals that could indicate a shift in Japan’s ultra-loose monetary policy.
“Recent yen weakness had many market participants expecting Ueda to sound hawkish, but in the end, the Governor stuck to his recent narrative,” said Rodrigo Catril, senior FX strategist at National Australia Bank.
Analysts like Catril believe Japan’s economic conditions and rising price pressures provide a strong case for a rate hike in December. However, any move by the BOJ may face political scrutiny, especially as the ruling Liberal Democratic Party (LDP) works to regain public support following a poor performance in the recent Lower House elections.
The yen’s sharp depreciation, marked by a 7% decline since October, saw it breach the 156 per dollar threshold for the first time since July last week. This slide has raised concerns about potential intervention by Japanese authorities, who have historically stepped in to stabilize the currency when deemed necessary.
In the broader currency market, the U.S. dollar softened after a stellar rally, easing further from last week’s one-year high against a basket of currencies. The dollar index inched up 0.04% to 106.26, following a 0.4% decline overnight.
“You do get bouts of profit-taking after big moves like this,” said Jarrod Kerr, chief economist at Kiwibank, explaining the dollar’s pullback. Despite the recent dip, the greenback remains up more than 2% for the month, buoyed by expectations that the Federal Reserve will maintain higher interest rates for longer.
The dollar’s ascent has also been supported by market speculation about President-elect Donald Trump’s economic policies. Proposals such as tariffs, reduced immigration, and debt-funded tax cuts are expected to stoke inflationary pressures, potentially leading to sustained interest rate hikes by the Federal Reserve.
The euro rebounded from its one-year low, trading at $1.0590, while sterling steadied at $1.2676. Two senior European Central Bank (ECB) officials expressed concerns on Monday about the potential economic fallout from Trump’s proposed U.S. trade tariffs, which they believe could weigh more heavily on eurozone growth than on inflation.
The Australian dollar slipped 0.15% to $0.6499 as traders digested the minutes from the Reserve Bank of Australia’s (RBA) November board meeting. Policymakers signaled no immediate need to adjust interest rates, emphasizing a cautious approach amid evolving economic conditions. The market remains hesitant, with a rate cut not fully priced until May next year and only a 38% probability of a move in February following the fourth-quarter inflation report.
Meanwhile, the New Zealand dollar, or kiwi, fell 0.24% to $0.5880. Markets are looking ahead to the Reserve Bank of New Zealand’s meeting next week, where traders anticipate 50 basis points of rate cuts.
The differing monetary policy outlooks among major central banks continue to drive currency markets.
- Federal Reserve: The Fed’s less dovish stance has kept the dollar well-supported as expectations for deep rate cuts next year wane.
- Bank of Japan: Governor Ueda’s cautious tone signals Japan’s gradual approach to policy normalization.
- European Central Bank: Concerns over U.S. trade tariffs and their implications for growth dominate discussions.
- Reserve Bank of Australia: A “wait-and-see” stance reflects uncertainty about near-term economic conditions.
- Reserve Bank of New Zealand: Easing measures are expected, with markets closely watching for signals on the extent of cuts.
The yen’s recent stabilization offers temporary relief to Japanese policymakers, who have faced growing pressure to act as the currency slid to multi-decade lows. However, the broader outlook remains contingent on the actions of central banks and geopolitical developments, including the trajectory of U.S. economic policies under Trump’s administration.
Currency traders will be watching upcoming economic data releases, particularly inflation figures and employment reports, which could influence the direction of monetary policies globally. With December approaching, the market’s attention is firmly fixed on potential policy shifts from the BOJ and the Federal Reserve, both of which could set the tone for currency markets into 2024.
