NEW YORK: The Japanese yen was heading for a monthly loss against the US dollar on Friday after the Bank of Japan disappointed traders hoping for a more hawkish stance on future rate hikes, while the Federal Reserve dampened expectations for a December rate cut.
The yen clawed back some losses after Japanese Finance Minister Satsuki Katayama said the government has been monitoring foreign exchange movements with a high sense of urgency as the yen weakens. Core inflation in Tokyo also accelerated in October and stayed above the central bank’s 2 percent target, data showed on Friday.
But disappointment after BOJ Governor Kazuo Ueda adopted a less hawkish tone on future rate hikes than hoped held the yen in check. The Japanese central bank kept rates on hold at 0.5 percent.
Noel Dixon, global macro strategist at State Street Global Markets, said he remains constructive on the yen, adding that “the BOJ ultimately is still going to have to normalize policy at least to 1 percent.”
“From a multi-year perspective, wages are definitely higher than they’ve been … and the fiscal spending is only going to exacerbate that prospect,” Dixon said.
Japan’s newly elected leader, Sanae Takaichi, is expected to pursue more fiscally expansive policies to boost economic growth.
Against the yen, the dollar was last down 0.1 percent at 153.96. It is heading for its worst month since July, with the dollar up 4.1 percent against the currency this month.
The dollar index rose 0.29 percent to 99.76 and is on track for a 2 percent monthly gain, its best since July.
The greenback has been boosted by optimism over the economic outlook even as the labor market weakens, while Fed policymakers remain concerned about inflation.
Fed Chair Jerome Powell said on Wednesday that a policy divide within the US central bank and a lack of federal government data may put another interest rate cut out of reach this year.
“It sounded like he was just trying to give himself some optionality,” said Dixon.
The Fed cut rates on Wednesday, as expected, though two policymakers dissented. Governor Stephen Miran again called for a deeper reduction in borrowing costs, while Kansas City Fed President Jeffrey Schmid favored no cut. Schmid said on Friday that he dissented out of concern that continued high inflation and signs of price pressures spreading in the economy could raise doubts about the central bank’s commitment to its 2 percent inflation target.
Dallas Fed President Lorie Logan also said on Friday that the Fed should not have cut interest rates this week and should not do so again in December, citing a ‘balanced’ labor market in no immediate need of support and inflation that looks likely to stay above policymakers’ 2 percent goal for too long.
Fed funds futures traders are pricing in a 65 percent probability of a cut in December, down from 92 percent a week ago, according to the CME Group’s FedWatch Tool.
The pound is heading for a 2.4 percent drop this month, while gilt yields have dropped on concern over what Reeves’ November budget might mean for businesses, households and overall economic activity.
In cryptocurrencies, bitcoin gained 2.74 percent to USD110,476.