By Hannah Lang and Harry Robertson
NEW YORK/LONDON (Reuters) – The yen fell on Wednesday after a senior Bank of Japan official played down the chances of a near-term interest rate hike, calming investor concerns that any further rise in the Japanese currency could rattle global markets again.
The yen fell about 2.5 percent to a session low of 147.94 yen per dollar after comments from Bank of Japan Deputy Governor Shinichi Uchida. The dollar was last up 1.79 percent at 146.940 yen.
“Given that we are witnessing sharp volatility in domestic and external financial markets, it is necessary to maintain current levels of monetary easing for the time being,” Uchida said.
His comments, which contrasted with hawkish comments by Bank of Japan Governor Kazuo Ueda last week when the bank unexpectedly raised interest rates, sent Japanese stocks higher, leaving them virtually flat for the week.
Last week’s interest rate hike by the Bank of Japan, coupled with intervention by Tokyo in early July, has prompted investors to pull back from previously popular carry trades, in which traders borrow yen at low interest rates to invest in assets offering higher returns.
A decline in investment in riskier assets, coupled with weak U.S. jobs data and concerns about the AI bubble, has led to a decline in global stocks this week, which began with a 12% drop in Japanese stocks on Monday.
“The drama — the turmoil and disruption — that accompanies these kinds of moves in stocks are great stories, but they don’t necessarily point to a larger economic catastrophe. I just don’t see it,” said Joseph Trevisani, senior analyst at FX Street in New York.
Wall Street’s major indexes rose on Tuesday and Wednesday, supported by big tech names such as Nvidia (NASDAQ:) and Amazon (NASDAQ:).
The dollar index, which measures the currency against six rivals, rose 0.12% to 103.1, remaining above a seven-month low of 102.15 touched on Monday.
“I think it’s becoming increasingly clear that the hawkish shift the Bank of Japan took last week may have been a policy mistake,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. “The Japanese economy is actually in poor shape, especially domestic demand.”
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The yen’s decline was broad-based, with the Mexican peso, New Zealand dollar and Australian dollar – all candidates for carry trade investment – rising against the currency.
The Swiss franc, another currency used to fund long positions like the yen, fell by about 1.36% to 0.863 Swiss francs per dollar.
The euro was steady at $1.093, down from an eight-month high of $1.101 hit on Monday as the dollar fell. Sterling rose 0.21 percent to $1.272.
Traders increased their bets on a Federal Reserve rate cut on Monday after an unexpected rise in the unemployment rate on Friday, at one point estimating more than 125 basis points of rate cuts this year.
Those bets have gradually eased, with traders on Wednesday expecting 100 basis points of easing this year and a 62% chance of a 50 basis point cut in September, after estimating it as a near certainty on Monday.
“I think you’re starting to see people say, hey, let’s go deeper into the details of what’s happening in the labor market, and really come to the conclusion that things are not collapsing at lightning speed in the U.S.,” said Stephen Meeran, chief strategist at Hudson Bay Capital.
Elsewhere, the Australian dollar rose 0.62 percent to $0.656, a day after the central bank ruled out the possibility of cutting interest rates this year, saying core inflation was only expected to fall slowly.
The Japanese dollar has struggled in recent days, falling to an eight-month low on Monday in the wake of the global market meltdown, but rebounded the day after the Bank of Japan’s comments.
The New Zealand dollar rose 1.02% to $0.602 after strong jobs data.
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