Major currencies pause as BOJ, Fed decisions loom

Major currencies came to a standstill on Tuesday as investors look to this week’s policy meetings of the Bank of Japan and Federal Reserve, with speculation rife that the Japanese central bank will make crucial changes to its easing programme.

The dollar dipped to 101.84 yen, about 0.4 per cent lower than late last week though it remained well anchored in its trading range of the past weeks between 101.20 and 103.35.

BOJ policy review

BOJ officials have suggested in recent weeks that there is room to cut interest rates further despite criticism that they are hurting financial institutions and even damaging economic sentiment.

Indeed, there is talk the BOJ could make negative interest rates the primary focus of its monetary policy at this week’s review.

The central bank has also acknowledged the potential costs of the unorthodox policy, prompting speculation the BOJ will probably seek to steepen the yield curve to mitigate the impact of negative rates on financial institutions.

Yet currency market players are not so sure such a step would help to reverse the yen’s rising trend this year amid a growing sense that the BOJ may be running out of ammunition.

“It will be difficult for the BOJ to come up with a measure that will significantly push down the yen,” said Koji Fukaya, CEO of FPG Securities.

In fact, dealers note that selling the dollar/yen after the BOJ’s policy meeting has been a winning strategy this year.

The yen gained sharply following the BOJ’s last few meetings as its policy decisions largely disappointed markets.

“The BOJ may not take easing steps this time, in which case the dollar/yen could test, 101, or 100 yen,” Fukaya added.

Fed rate hike

Another uncertainty for markets stems from the Fed after policy makers struck a hawkish tone in recent speeches, saying the world’s biggest central bank is ready to lift interest rates in the near future.

While the overwhelming consensus is for the Fed to hold rates steady this week, some market players expect it to drop a clearer hint that it is ready to raise rates.

That should support the dollar broadly at a time when most other central banks in the world remain in an easing cycle.

In early Tuesday trade, the dollar index against a basket of six major currencies slipped to 95.938 from Friday’s two-week high of 96.108.

The euro firmed to $1.1178 from Monday’s low of $1.1149, which was its lowest level in nearly two weeks.

The British pound edged up to $1.3038, slowly recovering from one-month high of $1.2996 touched last week after the Bank of England left the door open to a further cut in interest rates by the end of the year.