LONDON: The dollar was heading for its biggest one-day rally against the yen in two weeks on Friday, after the Bank of Japan governor reiterated there would be no change in the central bank’s handling of monetary policy.
The dollar was already up on the day against a basket of currencies, as a slew of data this week from consumer spending to business activity and inflation across major economies highlighted an increasingly fragile outlook for growth.
The U.S. currency has lost about 1.3% so far in January, having fallen nearly 8% in the final three months of 2022, when investors began factoring in a higher chance of the Federal Reserve slowing down the pace of interest-rate rises.
The Japanese yen bore the brunt of the dollar’s strength. The dollar rose by as much as 1.21% to a high of 129.965 - its largest one-day gain since Jan. 4. The yen, which investors have long favoured as a safe-haven and a funding currency, has had a volatile few weeks.
BOJ Governor Haruhiko Kuroda, who was addressing the World Economic Forum in the Swiss town of Davos on Friday, said the central bank will continue its current “extremely accommodative” monetary policy to achieve its 2% inflation target in a stable, sustainable manner.
Speculators are betting that the BOJ, the last major central bank to still employ loose monetary policy, is edging towards a shift to a tighter stance. That has driven a rally in the yen that has pushed the dollar/yen currency pair down by 14% in the past three months.
Dollar subdued as growth concerns mount, yen retreats
Data on Friday showed Japan’s core consumer prices in December rose 4.0% from a year earlier, double the BOJ’s target.
“Japan now has an inflation problem that it hasn’t had in nearly 40 years,” CMC Markets chief strategist Michael Hewson said.
“For me, the die is cast - dollar/yen will go lower and it’s a question of how quickly,” he said.
The BOJ on Wednesday maintained its ultra-loose monetary policy, though investors had thought it could signal a change.
A flurry of U.S. data on Thursday indicated the world’s biggest economy was slowing down after multiple rate increases by the Fed. Money markets show traders are preparing for an end to rate rises by the middle of this year.
However, the number of Americans filing new claims for unemployment benefits unexpectedly fell last week, pointing to another month of solid job growth and continued labour market tightness.
“Looking at the way the markets are going so far this year, they got off to storming start and at some point there was always going to be a bit of a pullback and we’re certainly seeing that now,” CMC’s Hewson said.
With much top-tier data out of the way now, investors are waiting for the first Fed meeting of the year in early February.
The central bank raised interest rates by 50 basis points (bps) in December after four straight 75 bps increases, and the market is eagerly anticipating another stepdown.
ING economists said the intense scrutiny of U.S. growth means that the dollar remains vulnerable to data releases as markets keep scaling back Fed rate expectations.
“The fact that the ongoing dovish repricing is not only a consequence of slowing inflation but also of a worsening economic outlook in the United States has exacerbated the negative implications for the dollar,” according to ING economists.
Meanwhile, the euro held steady at $1.0829, while sterling fell 0.3% to $1.2352, after UK data showed a surprise drop in retail sales in December, as British shoppers bought less, but spent more.
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