Yen slides after BOJ stays dovish; dollar regains ground

SINGAPORE/LONDON  – The yen weakened on Friday as the Bank of Japan held to its dovish stance, while the dollar was trying to rebound across the board from losses early in the week on expectations the Federal Reserve will hint at slowing its aggressive pace of rate hikes.

The dollar was last up 0.8 percent against the yen at 147.43 after the BOJ left unchanged its -0.1 percent target for short-term interest rates and its pledge to guide the 10-year bond yield around 0 percent, as expected.

“”We don’t plan to raise interest rates or head for an exit (from easy policy) any time soon,” said BOJ Governor Haruhiko Kuroda.

He also said that if Japan was nearing 2 percent inflation they would change policy, but that would be clearly communicated to markets.

“You can still hear from Kuroda that he remains quite ambivalent about yen weakness. And he’s still basically wedded to the current policy settings of the BOJ. It’s basically telegraphing to the world that he’s not going to change tack anytime soon,” said Alvin Tan, head of Asia FX strategy, RBC Capital Markets.

The dollar was also firmer on both sterling which was down 0.4 percent at $1.1516, and the euro, which traded down 0.2% $0.9941, with investors in a slightly cautious mood.

The common currency was also still licking its wounds after its 1 percent fall the day before when markets took a dovish message from the European Central Bank’s 75 basis point rate hike.

“There is a lot of data out from the U.S. today, and also some weak tech earnings and that is dragging on risk sentiment today,” said Simon Harvey, head of FX analysis at Monex Europe.

The U.S. latest PCE deflator report and Employment Cost Index will be released today ahead of next week’s rate-setting FOMC meeting.

Nonetheless due to gains earlier in the week the euro was set for its second successive weekly rise on the dollar, and sterling its third, the pound’s longest such streak since February.

Harvey attributed this to investors who had been sitting on the sidelines holding dollars looking for reasons to buy back into markets, which they had found early this week and the week before.

This trend was also driven by expectations the Fed will slow its aggressive rate-hike pace in December even if expectations are still for a 75 basis point rate hike at next week’s FOMC meeting.

The more dovish ECB and the Bank of Canada announcing a smaller-than-expected interest rate hike this week also drove these expectations, even as fears grow markets are getting ahead of themslevs.

“But I think the Fed is in a different position. It’s slightly more difficult for the Fed to join the pivot party, because the inflation problem is more persistent there, so I expect a bit of pushback from the Fed, and that’s probably going to benefit the dollar,” said Moh Siong Sim, a currency strategist at Bank of Singapore.

The dollar was also firmer against the Swiss franc the Australian dollar and the Norwegian and Swedish crowns