SINGAPORE: The dollar drifted up from multi-month lows on Tuesday, while the yen was perched near seven-month highs as investors held their breath for a potential policy shift at the Bank of Japan.
The euro reached a nine-month high on Monday at $1.0874, but was last loitering around $1.0805.
The yen hit a top of 127.22 per dollar during Asia hours on Monday, before easing a little during a holiday-thinned U.S. session to sit around 128.96.
Speculation is building about a change or end to Japan’s yield curve control policy, given that the market pushed 10-year yields above a ceiling set by the Bank of Japan (BOJ) of 0.5% on Friday and Monday and the amount of bond buying to defend it is starting to look unsustainable.
A newspaper report last week has also stoked expectation for a change, so traders are on the lookout for a sharp reaction even if the BOJ makes no move at its two-day meeting ending on Wednesday. The yen rose 3% against the dollar last week, and one-week implied volatility for dollar/yen is at its highest since March 2020.
“The market has run pretty hard with this story and is looking for a follow up,” said Tony Sycamore, an analyst at brokerage IG Markets.
He sees three main possibilities: no policy change, a tweak similar to a move in December to widen the 10-year yield target band, and the total abandonment of the yield curve control policy, with the latter likely to drive the most extreme market response.
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“The yen would explode higher, Japanese government bond yields would explode higher and global yields would go higher,” he said.
Elsewhere, the U.S. dollar index bounced from a seven-month low of 101.77 made a day ago and held at 102.50. Sterling touched its highest since mid-December at $1.2288 before easing back to $1.2177 in Asia trade.
There was not a great deal of currency market reaction to stronger-than-expected Chinese growth data.
At 2.9% fourth-quarter year-on-year growth was far stronger than the 1.8% consensus forecast, helped by retail sales falling a lot less than feared in December. Economists said that bodes well for recovery, but markets were less sure about how to take the surprise and sent the yuan a little bit lower.
The Chinese currency last traded about 0.3% weaker at 6.7586 per dollar.
The Australian dollar, which hit a five-month high just above $0.70 on Monday and wobbled around $0.6960. The New Zealand dollar held at $0.6394.
Traders are looking ahead British labour data, U.S. earnings and Canadian inflation figures later in the day.
Bitcoin which has been on a tear in recent days steadied above $20,000 and last bought $21,074.
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