The yen slid against the dollar on Friday following a Reuters report indicating that the Bank of Japan (BOJ) is inclined towards maintaining its current key yield control policy in the upcoming week. This decision comes just ahead of a crucial series of central bank meetings, involving the U.S. and Europe.
According to five reliable sources familiar with the matter, BoJ policymakers prefer to analyze more data to ensure continuous growth in wages and inflation before contemplating any changes to the existing policy. The report mentioned that there is no consensus within the central bank, making the final decision a potentially close call. As a result of this news, the dollar recorded its most significant one-day gain against the yen since April, rising by 1.3% to reach a nearly two-week high of 141.91. Prior to the report, the dollar had already gained around 0.3% against the yen.
Earlier in the session, trading in the yen had been relatively subdued, partly due to the announcement that Japan's core inflation had risen to 3.3%, matching the median market forecast and remaining above the BOJ's 2% target. Kenneth Broux, head of corporate research for FX and rates at Societe Generale, commented on the sharp move in the yen, suggesting that it might prompt Japan's finance ministry to issue further public statements to support the currency.
"It puts more pressure again on the ministry of finance," Broux stated, noting that the report echoed remarks made by BOJ Governor Kazuo Ueda earlier in the week. As inflation has surpassed the BOJ's target for over a year, speculations have been rife that the central bank might consider tweaking yield curve control as early as the July 27-28 meeting.
On Friday, Japan's benchmark 10-year government bond yield plummeted by 5 bps to 4.1%, reaching its lowest level since July 6, just before the speculation about a hawkish tweak to the policy this month began to gain traction. Earlier in the day, the yield had climbed as high as 0.48%, coming within 2 bps of the BOJ's policy ceiling and close to last Friday's four-month peak at 0.485%.
As investors eagerly anticipate central bank meetings in Europe and the United States scheduled for the following week, they scrutinize data to gain insights into the potential trajectory of monetary policy. The dollar index, which tracks the greenback against six major peers, including the yen, rose by 0.3% on Friday, reaching 101.040. The index was en route to a 1.1% weekly gain, representing its most substantial increase in two months.
Thursday's data revealed that the number of Americans filing new claims for unemployment benefits unexpectedly declined last week, reaching the lowest level in two months amidst ongoing labor market tightness. Money markets are now pricing in a 96% probability of a 25 basis point hike from the Federal Reserve in the following week.
FOREX-Dollar Slides as Inflation Surprise Spooks Bulls