Dec 10 : The yen was set to snap a three-day losing streak on Wednesday after being pressured by wide interest rate differentials between Japan and the rest of the world even as its central bank is widely expected to tighten policy next week.
The dollar dropped slightly ahead of a Federal Reserve decision later in the day, with investors expecting a cut after one of the most fractious policy debates in years.
The yen was up 0.12 per cent at 156.69 per dollar, after a 0.6 per cent fall towards the 157 level in the previous session.
Against the euro, the Japanese currency sank to a record low overnight at 182.64 and was last down 0.05 per cent at 182.00.
“It just looks like a little bit of the whipping boy of the markets at the moment,” said Alex Hill, managing director at Electus Financial, adding that a rise in long-term U.S. yields and fiscal and growth concerns in Japan have weighed on the currency.
“We’re looking at maybe yen weakness into the new year. And I think that kiwi/yen, Aussie/yen, all of the Antipodean crosses especially look well positioned to go higher.”
BANK OF JAPAN EXPECTED TO RAISE RATES
The Bank of Japan meets next week and is expected to raise interest rates. The market will also follow closely what Governor Kazuo Ueda says about the future policy path.
Expectations of more expansionary fiscal measures in Japan have complicated the outlook for BOJ policy under which rates remain among the lowest in the world, in contrast to its peers elsewhere. Australia’s central bank on Tuesday said there was a risk of rate hikes if inflation pressures persist.
Bart Wakabayashi, branch manager at State Street in Tokyo, said their flows suggested positioning on dollar/yen was neutral but showed buying of euro/yen and Aussie/yen.
WAITING FOR A FED DECISION
The broader market was focused on the Fed’s decision due later on Wednesday, in which a 25-basis-point rate cut is almost fully priced in, with traders focused on what Fed Chair Jerome Powell says and how many cuts the dot plot will lay out for 2026.
“The Fed Board is the most divided it has been in five years, with two almost evenly split camps. Six members lean towards easing, including two with Make America Great Again affiliations, and six lean towards holding rates unchanged,” said Kevin Thozet, a member of the investment committee at Carmignac,
“Should, as we and markets expect, Powell deliver a 25-basis-point cut this week to satisfy the doves, he will likely accompany it with a more restrictive message to reassure the hawks,” he added.
Investors have pared expectations of rate cuts in 2026 on lingering inflation concerns and expectations of a more resilient U.S. economy.
Data on Tuesday showed U.S. job openings increased marginally in October after surging in September.
White House economic adviser Kevin Hassett, the front-runner to be the Federal Reserve’s next chair, told the WSJ CEO Council on Tuesday there was “plenty of room” to cut interest rates further, though he added that if inflation rises the calculation may change.
EURO SUPPORTED BY THE RATE OUTLOOK
The euro rose 0.23 per cent to $1.1654 as investors focused on its gap with U.S. bond yields and saw little chance of a significant drop in euro zone rates in the near term.
Strong economic data and comments from ECB policymaker Isabel Schnabel – who said a rate hike was more likely than a cut – led investors on Monday to price out a European Central Bank rate cut in 2026 and assign more than a 50 per cent chance of a hike in March 2027.
Markets monitored developments in Ukraine, while the European Union neared a deal to fund Kyiv in 2026 and 2027 that would win backing from at least a qualified majority of member states.
In other currencies, the Australian dollar bought $0.6652, having risen to a near three-month high in the previous session on hawkish comments from Reserve Bank of Australia Governor Michele Bullock.