Herbert Lash and Stefano Rebaudo
NEW YORK (Reuters) – The yen hit a new multi-month low against the dollar on Wednesday, hours before the Federal Reserve wraps up a two-day policy meeting after the Bank of Japan (BOJ) raised interest rates for the first time yesterday by 17 years.
Analysts say the yield differential between U.S. Treasuries and Japanese government bonds remains wide and will continue to weigh on the yen as it approaches a multi-year low of 151.94 hit in October 2022. Last November, the dollar rose to 151.92.
But major central banks are largely in sync as they plan to cut interest rates to boost economic growth as the economy slows and inflation continues to slow.
“Nobody expects the Bank of Japan to embark on a long cycle of rate hikes,” said Bipan Rai, head of North American currency strategy at CIBC Capital Markets in Toronto. “You’re still going to end up in a scenario where the interest rate differential between the United States and Japan looks quite large.”
The dollar was last up 0.6% against the yen at 151.79.
A potentially aggressive meeting of the Federal Open Market Committee creates risks of a depreciation of the yen, which could provoke a new round of measures from the Japanese authorities to support it.
While investors expect the US central bank to keep interest rates unchanged during its policy announcement at 2:00 pm ET (18:00 GMT), Fed Chairman Jerome Powell’s statement and comments could be more hawkish on timing and extent of future easing.
“If the yen falls further from current levels, I would expect some verbal intervention from Japanese authorities to support the currency,” said Athanasios Vamvakidis, global head of currency research at BofA.
The yen weakened and Japanese government bond yields fell after the Bank of Japan announced on Tuesday it would end years of ultra-loose monetary policy.
“The Bank of Japan has decided to abandon its policy of negative interest rates. They have raised the rates, but for now they remain at that level. In the meantime, they will continue to buy the same amount of bonds,” said BofA’s Vamvakidis.
The yen’s fall was wide-ranging, with the currency falling to 164.71 against the euro, its lowest level since 2008, while against the pound the yen fell to 192.84, its lowest level since 2015.
Low Japanese rates have made the yen the preferred funding currency for carry trades, in which traders typically borrow a low-yielding currency to then sell and invest the proceeds in assets denominated in a higher-yielding currency.
The exchange rate of the American currency against six others increased by 0.25% to 104.100.
Recent stronger-than-expected U.S. inflation reports have prompted traders to cut bets further on a Fed rate cut this year, with markets now pricing in easing of 74 basis points (bps) by year-end, or about half of expectations at the beginning of 2024.
The euro fell 0.25% to $1.0838 as investors prepared for the Federal Reserve meeting. European Central Bank President Christine Lagarde said on Wednesday that the ECB will remain data-driven and will not commit to a predetermined number of rate cuts even as it begins to ease its monetary policy.
The index was down 0.19% at $0.6518, a day after Australia’s central bank kept interest rates steady as expected.
In cryptocurrencies, Bitcoin was last up 2.71% at $63,572.00.