FOREX-Dollar Steady, yen Falls as Traders Await the Bank of Japan's Policy Decision
The US dollar held steady on Wednesday, while the yen fell as investors awaited the Bank of Japan's policy decision, which could signal the end of Tokyo's ultra-easy monetary policy.
Last month, the central bank surprised the market by raising its 10-year yield cap to 0.5% from 0.25%, effectively doubling the range it would allow above or below its target of zero. Since then, speculation has swirled that the BOJ's yield curve control (YCC) policy would be tweaked further.
The Japanese yen fell 0.56% against the US dollar on Wednesday, closing at 128.83 per dollar, down from a seven-month high of 127.25 on Monday. The dollar index, which compares the safe-haven currency to six others, was unchanged at 102.400.
According to Kristina Clifton, senior economist and senior currency strategist at Commonwealth Bank of Australia, the meeting is likely to cause significant volatility in currency markets, with a dovish stance causing the dollar/yen to rise by 2-5 yen.
"By contrast, any policy change may be interpreted by markets as a step toward policy normalisation, pulling the dollar/yen lower, potentially sharply lower," Clifton said.
The 10-year yield on Japanese government bond breached the BOJ's ceiling for three straight sessions to Tuesday, leading to a wave of emergency bond buying by the government.
Some investors believe the BOJ will be forced to adjust, or even dismantle, YCC as soon as this week because the central bank will be unable to sustain the massive volume of bond buying required to defend the cap.
"The pressure on the JGB market in recent weeks, combined with the prospect of rising Japanese inflation, leads us to conclude that the BOJ will deliver a strong signal that the end of YCC is near," said Rodrigo Catril, a strategist at National Australia Bank in Sydney.
"If the Bank maintains its YCC band, this is likely to be accompanied by a commitment to purchase more JGBs, but given market pressure, we suspect that the Bank will have to give a strong signal that a policy shift is imminent."
Meanwhile, the pound was last trading at $1.2274, down 0.11% on the day, while the euro fell 0.03% to $1.0785.
The Australian dollar fell 0.04% to $0.698, while the New Zealand dollar rose 0.03% to $0.643.