The yen has experienced a slight recovery following threats of intervention from Japanese authorities, as well as investors shifting their focus to the Federal Reserve’s policy decision later today. The dollar was down 0.33 percent at 151.24 yen, after comments from Japan’s top currency diplomat, Masato Kanda. On Tuesday, the yen reached a one-year high as it slid after the Bank of Japan redefined its 1 percent limit on 10-year government bond yields. However, the tweak disappointed investors who were anticipating a stronger move away from ultra-loose monetary policy. Despite the yen’s drop of almost 14 percent against the dollar this year, the gap in bond yields between Japan and other countries has not closed entirely, which has contributed to the yen’s decline.
Claudio Irigoyen, global head of economics at Bank of America Global Research, noted that interest rate differentials continue to favor the US, leading to a faster normalization for the Bank of Japan in comparison to the rest of the world. On Tuesday, the yen traded weaker than 160 per euro for the first time since 2008, but it recovered slightly to 159.68 on Wednesday. Alvin Tan, head of Asia FX strategy at RBC Capital Markets, stated that the market will attempt to determine the “red line” for the Ministry of Finance, adding that it is not at 150 yen per dollar. However, Tan warns against being too exposed when the Japanese authorities intervene.
Trading in currency markets remained subdued, with the US dollar index inching 0.11 percent higher to 106.78. Economists anticipate that the Federal Reserve will keep interest rates on hold when it announces its decision, with investors closely analyzing Chair Jerome Powell’s comments for hints on the duration of the current interest rate level and the possibility of any future increases. The dollar index has been relatively stable after reaching an almost one-year high in early October due to a rise in US bond yields driven by robust economic growth.
Analysts suggest that a significant event for bond and currency markets today will be the US Treasury’s announcement on how it plans to fund its wide budget deficits using the bond market. In the wake of Tuesday’s decline in growth and inflation, the euro fell 0.17 percent to $1.0558. CBA analyst Carol Kong mentioned that the data indicates the European Central Bank’s interest rate hikes are limiting demand, leading to an estimated recession in the euro zone economy. Ahead of the Bank of England’s interest rate decision on Thursday, the pound was down slightly at $1.2149. Meanwhile, the Australian dollar rose 0.13 percent to $0.6345. Factory activity indicators in China, Japan, and South Korea showed a slowdown in October.
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