The dollar gained ground against the yen on Wednesday, as traders weighed the possibility of an early exit from the Bank of Japan’s negative interest rate policy. The greenback was also supported by expectations of a strong U.S. inflation report later in the day.
BOJ governor sparks speculation
The dollar rose around 0.2% to 147.36 yen, recovering from a two-month low of 146.65 hit on Monday, after BOJ Governor Kazuo Ueda said over the weekend that the central bank could consider raising its policy rate from minus 0.1% if inflation reaches its 2% target.
Ueda’s comments were seen as a rare hawkish signal from the BOJ, which has been maintaining an ultra-loose monetary stance for years to combat deflation and support the economy. The BOJ is widely regarded as a dovish outlier among major central banks, especially since the Federal Reserve began its aggressive rate-hike cycle in March 2022.
However, some analysts cautioned that Ueda’s remarks were conditional and did not imply an imminent policy change. They also noted that influential ruling party lawmaker Hiroshige Seko, a close ally of Prime Minister Shinzo Abe, expressed his preference for keeping the BOJ’s stimulus intact on Tuesday.
“As investors have more time to consider Ueda’s comments, ‘the fundamental driver of the upside pressures on yen’ have returned,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. “I think the market also is reading the statement more carefully. The statement to our mind was quite a conditional one, (Ueda) didn’t promise anything.”
U.S. inflation data in focus
The dollar was steady against other major currencies, as investors awaited the release of the U.S. consumer price index (CPI) data for August later on Wednesday. The CPI is expected to show a 0.4% increase from July and a 5.3% rise from a year ago, according to a Reuters poll.
The inflation report is seen as a key factor for the Fed’s decision on interest rate policy at its meeting next week. While the Fed is largely expected to keep rates on hold at 0.25%-0.5%, the market is divided on whether it will raise them again in November or December.
“I think there is a chance for the Fed to raise interest rates another time this year,” said Tina Teng, market analyst at CMC Markets. “The inflation data will be very important to watch, because it will indicate how much pressure the Fed is facing from rising prices.”
A higher-than-expected inflation reading could boost the dollar by increasing the odds of a Fed rate hike, while a lower-than-expected figure could weigh on the greenback by easing those expectations.
Euro awaits ECB decision
The euro edged down 0.07% to $1.0745, after hitting a one-week high of $1.0777 on Tuesday, as markets raised their bets of further rate hikes from the European Central Bank (ECB) ahead of its monetary policy decision on Thursday.
The ECB is expected to raise its deposit rate by 10 basis points to minus 0.4%, following nine consecutive increases since June 2022. The ECB has been tightening its policy to combat rising inflation in the euro zone, which hit 3.4% in August, well above its target of below but close to 2%.
“In recent months, European inflation, core inflation in particular, has fallen more slowly than expected. This has given the ECB some serious headaches,” said analysts at Rabobank in a note.
The euro could gain further if the ECB signals more rate hikes in the coming months, or lose ground if the ECB adopts a more cautious tone amid signs of slowing economic growth and political uncertainty in Germany and France.