Yen falls after soft growth figures, dollar holds as traders weigh rate outlook

LONDON: The Japanese yen fell on Monday following meagre growth figures, while the US dollar was broadly steady as recent inflation data bolstered bets for interest rate cuts from the Federal Reserve this year.

Liquidity is likely to be thin through the rest of Monday, with markets in the US closed, while China, Taiwan and South Korea were also out for holidays.

The yen eased 0.4percent to 153.32 per US dollar on Monday after climbing nearly 3percent last week - its biggest weekly jump in about 15 months - following Prime Minister Sanae Takaichi’s Liberal Democratic Party landslide election victory.

Data on Monday though laid bare some of the challenges facing Takaichi and her government, with Japan’s economy barely growing last quarter, eking out an annualised 0.2percent expansion. “After the election, the political dust may be settling a bit, for the near term at least, and we are seeing the yen increasingly becoming sensitive to data,” said Mohamad Al-Saraf, FX and fixed income associate at Danske Bank.

Bank of Japan Governor Kazuo Ueda and Takaichi held their first bilateral meeting since the election on Monday. Ueda said that the two had a “general exchange of views on economic and financial developments”.

He said the prime minister did not make any specific monetary policy requests. The BOJ next meets on rates in March, with traders ascribing 20percent odds for a hike. Economists polled by Reuters last month expected the central bank to wait until July before tightening policy again.

The BOJ lifted the key rate to a 30-year high of 0.75percent in December, although that remains well below most major economies, leading to significant yen underperformance that triggered bouts of direct intervention to support the currency over the past few years.

Data on Friday showed US consumer prices increased less than expected in January, giving the Fed additional leeway for policy easing this year.

“The markets are flirting with pricing in a third cut,” said Kyle Rodda, senior financial analyst at Capital.com. Money market traders are pricing in 62 basis points of easing over the rest of this year, implying two quarter-point cuts and about a 50percent chance of a third. The next cut is likely in June, with markets assigning over 80percent chance of a 25 basis point reduction.

The euro was down about 0.1percent at USD1.1854, while sterling eased slightly to USD1.3638. The US dollar index, which measures the currency against six major peers, was up just 0.1percent at 97.06 after dropping 0.8percent last week.