Yen firms as Bank of Japan sounds upbeat, refrains from more stimulus

The yen rose broadly on Tuesday after the Bank of Japan refrained from expanding its stimulus program, with Governor Haruhiko Kuroda maintaining his optimism about the country’s economic outlook.

While such an outcome was expected, a small number of market players had hoped for a surprise easing because of weak economic data over recent weeks. But Kuroda did not give any clue on the possibility of further easing, telling a press conference that Japan’s economy continued to recover moderately and that he expected exports to rise gradually.

The dollar fell 0.4 percent to 119.73 yen JPY= while the euro was down 0.6 percent at 135.20 yen EURJPY=. Traders said the safe-haven yen was likely to be underpinned by any signs of stock markets faltering on worries about a U.S. interest rate hike or a slowdown in China.

“Kuroda sounded surprisingly upbeat and that is why dollar/yen is edging higher,” said Alvin Tan, currency strategist at Societe Generale, London.

“But we still think the BOJ will have to opt for additional easing in the fourth quarter if they have to achieve their inflation target of 2 percent. In the short term, though, we will see dollar/yen chopping around in the 118.50-121.50 range ahead of the Fed meeting.”

The dollar index .DXY was flat at 95.278, having slipped to 94.913 on Monday, its lowest level since late August, as traders wait to see whether the Federal Reserve will raise interest rates this week for the first time in almost a decade.

Volatility in financial markets since last month has led many investors to believe the Fed will refrain from raising rates to avoid adding to the instability. Markets are pricing in a 30 percent chance of a rate hike, approximately.

The euro traded 0.15 percent lower at $1.12965 EUR=, having risen to $1.1373 on Monday, its highest since Aug. 26.

In the European session, the focus will be on sterling GBP=D4 ahead of UK inflation figures, expected to come in at zero. The lack of inflation is the central argument against a rise in UK interest rates. Jobs and wage growth have been more positive, however, supporting a view that the BoE will follow the Fed in raising rates sometime early next year.

“Until inflation rises, it is premature to speculate about rate hikes,” said Esther Reichelt, currency strategist at Commerzbank. “One thing everyone agrees on: the BoE will wait for a Fed rate hike before taking action itself.”

Source: Reuters