Electronic quotation boards display the Japanese yen's rate against the US dollar at a foreign exchange brokerage in Tokyo on Jan 16, 2023. (KAZUHIRO NOGI / AFP)
SINGAPORE – The dollar fell to a seven-month low against major peers on Monday while the yen spiked to an over seven-month peak as traders ramped up bets that the Bank of Japan may make further tweaks to its yield control policy at its meeting this week.
The Aussie breached the key $0.7000 level for the first time since August, and last rose 0.54 percent to $0.7013, after rising as high as $0.7019 earlier in the session.
Similarly, the euro hit a fresh nine-month top of $1.08725, and was last 0.3 percent higher at $1.0867.
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Against a basket of currencies, the US dollar index slumped 0.46 percent to a seven-month trough at 101.79, as the greenback extended its selloff from last week after data showed that US consumer prices fell for the first time in more than 2-1/2 years in December.
The Japanese yen rose to a more than seven-month peak on Monday, as expectations that the BOJ would make further tweaks to, or fully abandon, its yield control policy when it announces its monetary policy decision on Wednesday dominated market sentiment
With decades-high inflation in the world's largest economy showing signs of cooling, investors are now betting that the Fed may be nearing the end of its rate-hike cycle, and that rates would not go as high as previously feared.
"The confirmation of a deceleration in price pressures is building up hopes that CPI could fall further in coming months," said analysts at OCBC.
"An entrenched disinflation trend can reinforce expectations that the Fed could again scale back on its pace of hike beyond the February FOMC or even position for an earlier pause or dovish pivot."
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The Fed's aggressive rate increases have been a huge driver of the greenback's 8 percent surge last year.
Markets are now pricing in a 91 percent chance of a 25 basis point increase by the Fed when it announces its policy decision in February, with a 9 percent chance of a 50 bp increase.
Markets challenge BOJ
The Japanese yen rose to a more than seven-month peak on Monday, as expectations that the BOJ would make further tweaks to, or fully abandon, its yield control policy when it announces its monetary policy decision on Wednesday dominated market sentiment.
The yen jumped more than 0.4 percent to a high of 127.24 per dollar, and last bought 127.38 per dollar.
A Japanese flag flutters at the Bank of Japan headquarters in Tokyo on July 29, 2022. (SHUJI KAJIYAMA / AP)
Markets have been pressing for the BOJ to shift away from its ultra-easy monetary policy, which caused the yield on Japan's benchmark 10-year government bonds to breach the central bank's new ceiling for two sessions.
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"I think the whole world will be focused on Wednesday … and probably the week in G10 (currencies) will be defined by what happens to the yen and yen crosses, out of that," said Ray Attrill, head of FX strategy at National Australia Bank (NAB).
"I don't think (the BOJ) has the luxury of time to say that they're going to assess and wait until Q2 or Kuroda to see out his term without making any further changes."
Current BOJ Governor Haruhiko Kuroda will step down in April.
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The BOJ's yield curve control policy has been a huge factor behind the yen's 12 percent slump last year, and since the central bank's shock decision last December to widen the band around its yield target, the yen has jumped more than 6 percent.
Sterling was last 0.45 percent higher at a one-month peak of $1.2288, while the kiwi similarly jumped 0.6 percent to $0.64235, after hitting a one-month top of $0.64255 earlier in the session.
US markets are closed on Monday for a holiday, making for thin trading.