Yen gains ground on reports of possible rate hike

The yen rose today after news reports that the Bank of Japan is considering raising interest rates to 0.25% when its two-day meeting concludes on Wednesday.

That would be up from the current 0-0.1% and more than the market is currently pricing in, with a 10 basis point increase still seen as only a 55% probability.

Japan’s central bank will also announce plans to taper its massive bond purchases as it gradually unwinds a decade of large-scale monetary stimulus.

“We’ve seen a decent move in the yen on the day,” said Shaun Osborne, chief foreign exchange strategist at Scotiabank in Toronto. “Some people thought that move had probably already happened, but I think there’s still potential for some of these carry trades and some of the positioning to unroll a little bit further.”

The dollar last fell 0.47% to 153.29 yen. The dollar has fallen against the Japanese currency since hitting a 38-year high of 161.96 on July 3.

Osborne expects the yen to be at a reasonable value of around 145 to the dollar. He says that “there is still a long way to go before the short yen trade is completely cleaned up and perhaps even reversed.”

The dollar has fallen about 4.7% against the Japanese currency this month.

The yen had already weakened earlier today as investors closed out positions ahead of Wednesday’s rate decision.

“We obviously had a really big movement in the month of July,” said Brad Bechtel, global head of FX at Jefferies in New York.

Bechtel expects further gains in the yen to be temporary, as the currency is expected to continue to suffer from the wide differential between U.S. and Japanese interest rates.

“The yen will eventually weaken over time. It’s just a question of how long that period is,” Bechtel said. “There’s no point in being long the yen because nobody wants to pay carry when they can earn carry in a million other ways in the FX market.”

The dollar fell 0.03% to 104.55 against a basket of currencies, after earlier hitting 104.79, its highest level since July 11.

The Federal Reserve is expected to leave interest rates unchanged on Wednesday but may provide stronger signals that the bank is moving closer to a rate cut.

Traders expect rates to be cut in September and are also counting on a second and possibly third cut by the end of the year.

However, the US central bank is reluctant to give indications about rate cuts too soon, because this could lead to a rise in inflation. The US central bank is then more likely to give a signal during its economic symposium in Jackson Hole, Wyoming, next month.

Data out today showed US job openings fell slightly in June, with data for the previous month revised upward. Meanwhile, consumers’ perceptions of the job market are deteriorating.

The euro fell 0.06% to $1.0812, having earlier in the day touched $1.0798, its lowest level since July 8.

The eurozone economy grew slightly more strongly than expected in the three months to June, but a mixed underlying picture and a series of pessimistic surveys make the outlook for the rest of the year bleak.

The German economy unexpectedly shrank in the second quarter after being in recession at the beginning of the year, and inflation also rose in July.

Sterling weakened 0.2% to $1.2833 ahead of the Bank of England meeting on Thursday, with markets seeing it as a coin toss to see whether the BoE will cut rates.

In cryptocurrency terms, Bitcoin fell 2.64% to $65,586.

Additional reporting by Sruthi Shankar and Alun John.