Herbert Lash and Amanda Cooper
NEW YORK/LONDON (Reuters) – The yen fell to a four-month low on Tuesday after the Bank of Japan’s landmark and expected decision to end its negative interest rate policy, while the dollar strengthened ahead of the Federal Reserve’s latest rate forecast. .
After a two-day meeting of policymakers, Japan’s central bank ended eight years of negative interest rates and other remnants of unorthodox economic policies, a historic move after decades of massive monetary easing.
With most investors already anticipating the change, the yen fell more than 1%, falling to 150.96 per dollar in U.S. trading on the news.
The yen was last down 1.19% at 150.91 per dollar. Against the euro, the Japanese currency also fell 1.1% to 163.99, also its weakest in four months.
“They are very much in favor of trying to normalize the money market and the financial system locally,” said Brad Bechtel, global head of foreign exchange at Jefferies in New York. “I think they’ve made a lot of big strides to get there.”
Following Japan’s first rate hike in 17 years, the Bank of Japan said it would target the overnight bond rate (its new policy rate) between 0% and 0.1%, adding that it expected “comfortable financial conditions” to continue currently.
This is likely to continue to weigh on the yen as the US-Japan exchange rate differential remains sharp. It will also attract foreign investment in Treasuries and keep the dollar strong.
“The market took this as a green light to increase the already existing short position on the yen, given that the Bank of Japan’s forecasts were quite cautious and insufficient to cause further hawkish revaluation in the Japanese rates market,” MUFG currency strategist Lee Hardman said.
DOLLAR DOMINANCE
A series of central bank decisions will dominate the currency market this week, headlined by the Fed.
The US central bank will release its policy forecast on Wednesday, when it is expected to keep interest rates unchanged at 5.25%-5.50%. The market is awaiting clues about the likely course of monetary policy through policymakers’ economic forecasts for this year through 2026.
“Whenever the Fed and the Bank of Japan change policy settings around the same time, it is the Fed that controls and dominates the price action, even in the dollar/yen pair,” said Gareth Berry, Macquarie’s foreign exchange and rates strategist.
“So the decisions of the Bank of Japan in general, as far as the yen is concerned, are a matter of secondary importance.”
The index, which measures the U.S. currency’s performance against six other currencies, was near its highest level in two weeks, up 0.33% on the day at 103.90.
Recent data showing the resilience of the U.S. economy suggests inflation is still resilient enough to keep the Fed from cutting rates too much or too quickly this year, sending the dollar higher.
The Australian dollar fell after the Reserve Bank of Australia (RBA) left rates unchanged on Tuesday as expected but softened its forecasts on the likelihood of further rate hikes.
The rate fell 0.85% to a nearly two-week low of $0.6504, leaving the New Zealand dollar down 0.5% at $0.6055.
Elsewhere, a stronger dollar pushed the euro and sterling to two-week lows.
The euro was last down 0.08% at $1.0863 and sterling was down 0.2% at $1.2723.
In cryptocurrencies, Bitcoin fell as much as 7% to a two-week low after last week’s record highs prompted some profit-taking.
the largest cryptocurrency by market value, was last down 4.07% at $62,624.