The yen, up more than 12% since July, has been soaring because the BoJ has been raising rates at the same time as the Fed prepares to cut
The dollar wavered on Wednesday, while the yen regained some lost ground as investors made last-minute tweaks to positions ahead of U.S. policy meeting expected to begin easing cycle.
The Fed is expected to make its first interest rate cut in more than four years at 1800 GMT, with markets pricing a 2/3 chance of a 50 bp cut.
The dollar has declined along with U.S. yields since July and at $1.1119 per euro is not far from the year’s low at $1.1201 in anticipation of U.S. easing at a clip, with over 100 bps of rate cuts priced in by Christmas.
The yen, up more than 12% since July, has been soaring because the BoJ – which sets policy on Friday – has been raising rates at the same time as the Fed prepares to cut.
It gained around 0.7% to 141.41 per dollar on Wednesday, recovering part of an overnight decline. The yen was 0.6% higher at 157.24 per euro.
Elsewhere, the Australian dollar briefly hit a two-week high at $0.6773, while a rise in milk prices supported the New Zealand dollar at $0.6196, though moves were tentative ahead of the Fed’s meeting.
Traders say the Federal Reserve’s tone as well as the size of the rate cut will drive the reaction in the foreign exchange market.
A dovish Fed on a substantial easing path should generally lead to a weaker dollar, according to Nathan Swami, head of currency trading at Citi in Singapore.
But an extremely dovish Fed, Swami said, could end up spooking markets if it appears it anticipates a more ominous downturn in the economy than is expected, and in that case risk-sensitive and emerging market currencies may face headwinds.
