Volatility and Uncertainty Surround the Yen
The yen fell 0.2% to 142.41 per dollar in early Asian trade, partially reversing the nearly 2% gain it achieved last week due to the decline of the dollar. Over the past few weeks, the Japanese currency has experienced volatility as market participants attempt to gauge the timeline for the BOJ to phase out its negative interest rate policy. Comments made by Governor Kazuo Ueda earlier this month initially sparked a substantial rally in the yen, but this was later reversed when news emerged that a policy shift was unlikely to happen as early as December. Investors are now awaiting Tuesday’s BOJ decision for additional clarity regarding the bank’s interest rate outlook. Rodrigo Catril, senior FX strategist at National Australia Bank, commented, “The meeting will be relevant and important in terms of what the BOJ does, and there are some in the market that still expect that maybe there’s a surprise.”
Rate Cuts Loom for the Dollar
The dollar currently stands not far from four-month lows against the British pound and nearly five-month lows against the Australian and New Zealand dollars. These lows were reached last week after Federal Reserve officials hinted at potential rate cuts in the coming year. While sterling last sold for $1.2678, the kiwi rose 0.19% to $0.6219. The greenback, which has seen significant support from a series of aggressive rate hikes by the Fed and expectations of higher rates for an extended period of time, fell around 1.3% against a basket of currencies last week in response to the Fed’s policy meeting. The dollar index was last 0.05% lower at 102.57. Franck Dixmier, global chief investment officer for fixed income at Allianz Global Investors, said, “The Fed has officially opened the door to the next cycle of rate cuts.”
ECB and BoE Stand Firm on Interest Rates
The European Central Bank (ECB) and the Bank of England (BoE) both maintained their steady interest rates at their respective policy meetings last week, differing from the Fed’s approach. While the Fed hinted at potential rate cuts, the ECB and BoE pushed back against expectations of imminent cuts. Christine Lagarde, President of the ECB, made it clear that rate cuts were not on the table. Monica Defend, head of Amundi Investment Institute, commented, “The ECB and BoE kept interest rates steady at their respective policy meetings last week, though unlike the Fed, both pushed back against expectations of imminent rate cuts.” The BoE maintains a cautious stance and shows no indication of deviating from its ‘higher-for-longer’ policy.
Euro Weighed Down by Darkening Growth Outlook
The euro saw a 0.07% increase to $1.0900, aided by a weaker dollar. However, the single currency continues to be influenced by a darkening growth outlook in the euro zone. Data released last week revealed that the downturn in the bloc’s business activity unexpectedly deepened in December, suggesting that the economy is likely in a recession.