By Karen Brettell
(Reuters) – The Japanese yen weakened on Tuesday ahead of the Bank of Japan’s decision on whether to raise rates, while the dollar gained ahead of the Federal Reserve meeting, where any new indications of a rate cut in September will take center stage to stand.
The BOJ will announce its interest rate decision at the end of its two-day meeting on Wednesday. Markets are currently pricing in a 55% chance of a 10 bp rise.
The yen weakened ahead of the decision, as investors closed their positions after a significant rally this month, with the dollar losing around 4% against the Japanese currency.
“We clearly took a very big step in the month of July,” said Brad Bechtel, Global Head of FX at Jefferies in New York. Traders “are likely cleaning up ahead of the events, and month-end flows dominate today.”
Some economists are also not convinced that the BOJ is willing to raise rates.
“The market has certainly been quite enthusiastic about a rate hike, but economists and Bank of Japan observers are much less certain,” said Jane Foley, head of FX strategy at Rabobank.
Japan’s central bank will set out plans to scale back its massive bond purchases as it steadily winds down a decade of massive monetary stimulus.
If the BOJ cuts its bond purchases and doesn’t raise rates, that could be accommodative or neutral depending on the size of the taper, while a larger cut in bond purchases with a rate hike would be aggressive, Bechtel said.
But “either way… the yen will eventually weaken over time. It’s just a question of how long that period is,” Bechtel said. “There is no point in being long the yen because no one wants to pay carry when they can earn carry in countless other ways in the FX market.”
The dollar last rose 0.33% that day at 154.52 yen. On July 3, the price reached a 38-year high of 161.96 as the Japanese currency was hit by the large interest rate differential between the US and Japan. The yen has since recovered thanks to several interventions by the Japanese authorities.
The 200-day moving average of around 151.6 yen is likely to provide some support for the dollar.
The dollar gained 0.17% to 104.76 against a basket of currencies, the highest since July 11, before the Fed is expected to keep rates steady on Wednesday but may give stronger indications that rates are closer to rate cuts.
Traders see an interest rate cut in September as certain and are also anticipating a second and possibly third cut by the end of the year. The Fed is wary of hinting at cuts too quickly if inflation rebounds, which could make a signal more likely at the U.S. central bank’s economic symposium next month in Jackson Hole, Wyoming.
The euro fell 0.2% to $1.0797 as investors digested data showing the euro zone economy grew slightly more than expected in the three months to June, although a mixed underlying picture and a range of pessimistic surveys clouding prospects for the rest of the year.
The German economy shrank unexpectedly in the second quarter after sidestepping a recession at the start of the year, and inflation rose in July.
Sterling weakened 0.29% to $1.2822 ahead of the Bank of England meeting on Thursday. According to market prices, it is roughly a toss-up whether the BoE cuts rates.
In cryptocurrencies, bitcoin fell 1.60% to $66,289.
