The Bank of Japan’s (BOJ) recent move to end years of monetary stimulus has caused the yen to weaken to a 15-year low against the euro. However, some investors were left disappointed as they had expected a more significant step from the BOJ. Meanwhile, economic growth and inflation in the euro zone have also decreased.
During its two-day policy meeting, the BOJ made adjustments to its bond yield control policy, aiming to loosen its grip on long-term interest rates. It decided to keep the 10-year government bond yield around 0%, but redefined 1.0% as an upper limit rather than a strict cap. Additionally, the BOJ removed its pledge to defend the level with unlimited bond purchases.
As a result, the euro surged to a 15-year high against the yen, rising 1.3% to 160.35 yen. Meanwhile, the yen slid 1.2% to 150.89, marking a fresh one-year low. Traders focused on the BOJ’s indication that it would “patiently” maintain accommodative policy and predicted that inflation would drop below 2% by 2025.
Frederik Romedahl, a director at Danske Bank, stated that the BOJ’s recent move was likely the last step towards dismantling the yield curve control policy. However, he noted that the BOJ would need further confirmation of sustainable inflation above the 2% target before taking larger steps towards normalization.
In other news, the euro received support from expectations that interest rates would remain high. It increased by 0.1% to $1.0628, reaching a one-week high of $1.0675. The euro was set to reverse two consecutive months of losses with a 0.5% gain for October.
Euro zone inflation also rose in October, but at a slower pace of 2.9% compared to September’s 4.3%. This alleviated pressure on the European Central Bank (ECB) to raise rates. Additionally, euro zone gross domestic product (GDP) experienced a slight decline of 0.1% in the third quarter, which analysts believe does not warrant a rate cut by the ECB.
Joshua Mahony, Chief Market Analyst at Scope Markets, commented that the tightening measures implemented over the past year have achieved the desired soft landing and disinflationary environment that the ECB aimed for.
The dollar index increased by 0.07% to 106.24. Analysts noted that the dollar remains supported by the possibility of another rate hike from the Federal Reserve due to the resilience of the U.S. economy. They expect the Fed to maintain interest rates at its policy decision scheduled for Wednesday.
Ahead of an interest rate decision by the Bank of England later in the week, the British pound remained flat at $1.2160. Expectations are for the central bank to keep rates unchanged.
Overall, the BOJ’s recent move, along with developments in the euro zone and the U.S., has caused fluctuations in currency markets. Investors continue to closely monitor central banks’ policies and economic indicators to assess the future direction of these currencies.
(Article adapted from the original source: Reuters)
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