By Brigid Riley
TOKYO (Reuters) – The dollar and yen held within close ranges on Tuesday as traders awaited major central bank decisions, starting with midweek policy meetings from the Bank of Japan and the Federal Reserve, that could set the tone for the coming weeks.
The Japanese currency took a breather from its recent rally as the Bank of Japan began its two-day meeting on Tuesday, after rising more than 2% against the dollar last week.
A combination of factors has helped the yen rise from a 38-year low of 161.96 against the dollar hit at the start of the month, including a slide in global stocks and increased bets that the Bank of Japan will raise interest rates this week.
Markets currently price in a 10 basis point rate hike at 63%.
The Bank of Japan has already announced plans for quantitative tightening, with the centrist view calling for the bank to gradually halve its monthly bond purchases over a two-year period.
But questions remain about whether the Bank of Japan will raise interest rates on Wednesday amid weak economic growth.
“The real risk from the BOJ is that they don’t raise rates and the yen falls, given their tendency to miss expectations in recent meetings and hopes for a rate hike are very high,” said Matt Simpson, chief market analyst at City Index.
The US dollar rose 0.08% against the yen, to 154.125.
If the Bank of Japan decides not to raise interest rates, the dollar is likely to establish near-term support around current levels against the yen, said Andy Ji, chief Asia FX strategist at In Touch Capital Markets.
While expectations of narrowing interest rate differentials have helped ease pressure on the yen, Ji said the wide yield differential between the United States and Japan “is another reason why the yen’s rise will face more resistance.”
The US Federal Reserve is widely expected to hold steady on Wednesday, although markets are betting that the US central bank will start cutting interest rates at its next meeting in September.
Investors will be listening for any hints Federal Reserve Chairman Jerome Powell might give about how willing policymakers are to cut interest rates at his press conference.
While the Fed does not meet in August, Powell may also use the Jackson Hole meeting of central bankers later in the month to prepare the market for a rate cut, giving policymakers more time to assess economic data.
That includes Friday’s July employment report, with Federal Reserve officials increasingly focused on the potential for damage to the labor market if they continue to keep borrowing costs above inflation for too long.
But Simpson of City Index said failure to give a clear signal of a September rate cut this week could boost U.S. Treasury yields and the dollar.
The pound, which measures the currency against a basket of currencies, was little changed at 104.56.
Meanwhile, the Bank of England’s first rate cut since 2020 remains in the balance amid growing uncertainty, with key policymakers not speaking publicly for more than two months due to rules in the run-up to the July 4 election.
The pound was last trading at $1.2857, down 0.02% on the day. The euro rose 0.05% to $1.0824.
Elsewhere, the Australian dollar rose 0.09% against the US dollar to $0.65555 ahead of a key inflation report due on Wednesday that could confirm or deny the case for a rate hike by the Reserve Bank of Australia.
The pound rose 0.27% to $0.58915, retreating slightly from multi-month lows hit on Monday.
In cryptocurrencies, Bitcoin fell 1.08% to $66,634.87.
