Bank of Japan set to raise interest rates to 31-year high; Yen weakens

The yen got off to a weak start against the dollar and the euro at the start of Asian trading on Friday, with currency markets in a subdued mood ahead of an expected rate hike from the Bank of Japan later in the trading session.

The yen fell 0.1% to 156.19 yen per dollar, resuming its decline after snapping a three-day losing streak on Thursday as traders prepare for the Japanese central bank to lift interest rates to the highest level in more than three decades. Against the euro, the yen was 0.2% weaker at 179.3000 yen.

"Given the degree of pricing, the rate decision itself may have limited impact on the yen," said Chris Weston, head of research at Pepperstone Group in Melbourne. "Instead, attention should fall on the forward swaps curve and the bank’s guidance around the pace and urgency of further tightening."

"Governor Ueda’s press conference will therefore be key. The market will be looking for confirmation that further normalisation remains firmly on the table, while assessing whether the Bank sees any urgency to move again."

The yen's softness followed data released Friday which showed Japanese inflation fell slightly short of expectations in August. Swaps pricing indicates that the market views a hike from the BOJ as 83% likely, with quarterly rate hikes expected to follow, according to data from LSEG.



 

The British pound was flat at a 2-1/2-month low of $1.3359 after the Bank of England held interest rates on Thursday and unexpectedly paused sales of government bonds for six months.

The euro was flat at $1.1478. The Aussie dollar was 0.1% firmer at $0.7117 as Reserve Bank of Australia Governor Michele Bullock warned lawmakers that risks to inflation flagged by policymakers appeared to be materialising; its kiwi counterpart was down 0.1% at $0.5724.

The US dollar index, which measures the greenback's strength against a basket of six currencies, was flat at 100.2100, after edging back from a 2-1/2-month high on Thursday.

Traders narrowly expect a hike from the Federal Reserve next month as investors say they are becoming more confident in Chair Kevin Warsh's efforts to reassert the central bank's independence from the White House. Fed funds futures are pricing an implied 53% probability of a quarter-point hike at the central bank's next two-day meeting next month, compared with a 27.2% chance a week ago, according to the CME Group's FedWatch tool.

Oil prices started the day lower, with Brent crude futures off 1% at $103.76 per barrel as traders reassess supply risks after Saudi Arabia and Yemen's Iran-backed Houthis traded strikes on Thursday. China has asked Tehran to help rein in the Houthis after their military blitz over the past week, three Iranian sources familiar with the matter told Reuters.

In cryptocurrencies, bitcoin slid 0.1% to $76,442.97 while ether was down 0.2% at $2,447.39.

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