From Rae Wee
SINGAPORE (Reuters) – The yen was at the center of currency markets on Friday ahead of a policy decision by the Bank of Japan (BOJ) that is all but certain to raise interest rates, while the dollar headed for its worst week in two months.
The BOJ concludes its two-day policy meeting later in the day and markets have fully priced in a 25 basis point rate hike, with recent comments from BOJ officials also hinting at such a move.
Ahead of the decision, the yen was little changed at 156.11 to the dollar, having languished near a one-week low in the previous session.
The Japanese currency rallied last week on heightened expectations of a rate hike, but has since given up some of those gains as traders also await further clarification on the BOJ’s policy outlook.
“The BOJ is likely to continue raising interest rates,” said Vincent Chung, co-portfolio manager for T. Rowe Price’s diversified income bond strategy.
“We expect this initial rate hike in 2025 to be followed by a series of gradual increases, potentially bringing the policy rate to 1% by the end of the year. The policy rate could even exceed 1%, as this is closer to the lower end of the BOJ’s neutral rate range .”
Analysts say a sharp hike by the BOJ will be needed to prevent the yen from falling further after Friday’s decision, and officials are likely to have to signal further rate hikes in the future.
The euro rose 0.07% to 162.66 yen in the early Asian session, while the pound rose 0.08% to 192.80 yen.
Underscoring expectations of a rise in borrowing costs on Friday, data showed core consumer prices in Japan rose 3.0% in December from a year earlier, marking the fastest annual pace in 16 months.
DOLLAR BLIP
Otherwise, the dollar headed for its worst weekly drop in two months after US President Donald Trump’s expected tariff announcements after his inauguration failed to materialize, contrary to what he had threatened during his campaign.
The dollar was set to lose 1.2% against a basket of currencies, its biggest drop since November. It was last 0.06% lower at 108.08 on Friday.
The euro, meanwhile, rose 0.03% to $1.0419 and was on course for a 1.4% weekly gain, which would mark its best performance since November.
Sterling last traded at $1.2353 and was similarly poised for a 1.5% gain on the week, snapping three straight weeks of losses.
Additional headwinds for the dollar were comments by Trump who demanded that the Federal Reserve lower interest rates, claiming that he understands monetary policy better than those in charge of setting it.
“Trump’s comments … are a reminder that we’re just going to have this constant source of volatility coming from unusual comments, and of course, on paper, that calls into question a little bit of that independence of the Fed,” said Rodrigo Catril, senior FX strategist at National Australia Bank (OTC:).
Trump’s remarks come just days before the Fed’s first policy meeting of his administration, with officials widely expected to leave rates unchanged.
Elsewhere, the Australian dollar fell 0.05% to $0.6282, although it was on track for its best week since September with a 1.5% gain.
The New Zealand dollar eased 0.04% to $0.5674, but also headed for a weekly gain of 1.6%, also its best performance since September.
