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Dollar jumps vs yen as BOJ sticks with ultra-loose policy

by Jessica Weisman-Pitts
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2023 12 19T012700Z 1 LYNXMPEJBI012 RTROPTP 4 JAPAN YEN

Dollar jumps vs yen as BOJ sticks with ultra-loose policy

By Rae Wee and Alun John

NEW YORK (Reuters) -The U.S. dollar jumped against the yen on Tuesday after the Bank of Japan gave no sign that its ultra-loose monetary policy was set to end, but the dollar was broadly softer against other majors, weighed down by expectations for interest rate cuts next year.

The Bank of Japan maintained its ultra-loose policy settings as expected, as it opted to await more evidence on whether wages and prices would rise enough to justify a shift away from massive monetary stimulus.

The central bank also made no change to its dovish policy guidance, dashing hopes among some traders it would tweak the language to signal a near-term end to negative interest rates.

“Traders are pulling back on a move into positive rate territory from the Bank of Japan into early new year,” said Karl Schamotta, chief market strategist at Corpay in Toronto.

“There was no hint in the press conference or in the statement that policymakers are ready to move rates up dramatically,” Schamotta said.

The dollar was 0.76% up against the yen at 143.89 yen. Through Monday, the dollar had retreated about 3.7% against the yen this month, hurt by broad dollar weakness and also as traders stepped up yen-buying on speculation of a BOJ policy shift.

Meanwhile the dollar continued to struggle against most majors as traders sold the U.S. currency on expectations that the Federal Reserve is about to start cutting rates as early as March.

While Fed officials have pushed back against market expectations of how soon the Federal Open Market Committee (FOMC) could cut rates, those comments have done little to sway market pricing and stem the greenback’s decline.

The dollar index, which measures the currency’s strength against a basket of six rivals, was 0.35% lower at 102.13. The index has dipped 1.5% over the last week.

Chicago Fed President Austan Goolsbee on Monday said the Fed was not pre-committing to cutting rates soon or swiftly, and the jump in market expectations that it will do so was at odds with how the U.S. central bank functions.

“It may take (the) PCE inflation or comments from FOMC Chair (Jerome) Powell to encourage market participants to delay their expectations for the start of the rate cut cycle,” said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia.

A reading on the core Personal Consumption Expenditures (PCE) price index – the Fed’s preferred measure of underlying inflation – is due this week, and may provide clarity on whether inflation has slowed enough for the Fed to begin easing policy next year.

The risk-sensitive Australian and New Zealand dollars sat around their highest in nearly five months, further beneficiaries of the softening dollar.

The Aussie was 0.95% higher at $0.677, its highest since late July.

The kiwi rose 0.84% to 0.6264.

Minutes from the Reserve Bank of Australia’s December policy meeting showed on Tuesday that the bank considered hiking rates, but decided there were enough encouraging signs on inflation to pause for more data.

The Canadian dollar strengthened to a four-and-a-half-month high against its U.S. counterpart as investors reduced bets on an early start to Bank of Canada interest rate cuts after domestic data showed inflation holding steady in November.

The pound rose 0.68%, helped by the dollar’s broad weakness and as investors increasingly talked up sterling as a hot prospect for next year.

In cryptocurrencies, Bitcoin was about flat on the day at $42,384.

(Reporting by Saqib Iqbal Ahmed; Additional reporting by Rae Wee in Singapore and Alun John in London, additional reporting by Summer Zhen in Hong Kong; Editing by Christopher Cushing, Bernadette Baum and Ed Osmond)