The yen faced its most significant daily decline against the dollar in a month on Tuesday as recent comments from Japanese officials tempered expectations of an immediate policy shift by the Bank of Japan as early as next week.
Meanwhile, the dollar remained relatively stable ahead of a crucial U.S. inflation report scheduled later in the day. This data release will offer further insight into the timing of the Federal Reserve’s potential initiation of interest rate cuts this year.
The yen was last seen 0.4% lower at 147.47 per dollar and experienced a similar decline against the British pound, following an earlier rise to a one-month peak of 188.01 during the session.
The downward movement of the yen followed remarks from BOJ Governor Kazuo Ueda, who provided a somewhat more cautious outlook on Japan’s economy compared to January. Additionally, Finance Minister Shunichi Suzuki stated separately on Tuesday that Japan had not yet overcome deflation.
These statements preceded the BOJ’s upcoming policy meeting and amidst increasing speculation that the central bank might abandon its negative interest rate policy during the meeting, a development that had previously triggered a yen rally.
“I think there’s more uncertainty now, and I will expect there’s going to be a bit more volatility into the BOJ meeting,” commented Alvin Tan, head of Asia FX strategy at RBC Capital Markets. “Whether they’re going to move in March or not, I think that’s really still up in the air.”
The one-week implied volatility on dollar/yen, reflecting expectations for price fluctuations in the currency pair, surged to 12.115% on Tuesday, marking its highest level since December.
In the broader market, the euro retreated from a roughly two-month high reached last week, last trading at $1.0936.
Sterling saw a modest rise of 0.04% to $1.2816, although it remained some distance away from Friday’s more than seven-month peak.
Other currency movements, aside from the yen, were subdued, and the greenback paused its recent decline ahead of the U.S. inflation report scheduled for later on Tuesday.
Market expectations anticipate core consumer prices to have increased by 0.3% on a monthly basis in February. Investors will be closely monitoring for any surprises, particularly upward ones, akin to what occurred in January. Such surprises could impact the anticipated pace of Fed rate cuts.
“Were we to get a 0.2%, I think the market will be back on the scent of a possible May first Fed rate cut, and if we were to get a 0.4%, I think the market will be casting some doubt on a cut as early as June,” remarked Ray Attrill, head of FX strategy at National Australia Bank.
“So in that sense, I think it’s right to think that there will be a high degree of market sensitivity to anything other than a 0.3% core print.”
The Australian dollar slipped by 0.04% to $0.6612, while the New Zealand dollar edged 0.02% lower to $0.6169.
The dollar index rose by 0.04% to 102.83, rebounding from a roughly two-month low of 102.33 seen last week.
The recent decline in the greenback has coincided with increasing speculation that the Fed could commence rate cuts by June, particularly following comments from Fed Chair Jerome Powell last week that solidified those expectations.
Friday’s jobs data also indicated softening underlying labor market conditions in the world’s largest economy, with the unemployment rate climbing to a two-year high of 3.9% in February.
In the cryptocurrency realm, bitcoin saw a marginal decline of 0.78% to $71,587, although it remained close to surpassing a record high set in the previous session.
Ether reached a peak of $4,093.70, its highest level since 2021, before retracing some of those gains to last trade at $4,004.30.