Key facts
- The yen was quoted at 156.64 per US dollar.
- The Bank of Japan raised its policy rate to 1.25% on Friday.
- Japanese officials reportedly conducted rate checks, a precursor to intervention.
- The euro was little changed at $1.1482.
- The dollar index was steady at 100.23.
- Traders are pricing in a 55% chance of a Fed rate hike in October.
The yen traded slightly firmer at 156.64 per US dollar on Monday, a day after dropping 2% last week. This sharp decline has fueled speculation that Japanese authorities may intervene to support the currency. Markets were closed for a holiday, leading to low liquidity and keeping traders on alert.
Last Friday, the Bank of Japan raised its policy rate to 1.25%, marking its highest level in 31 years. However, the widely anticipated move failed to boost the yen as two dissenting votes and a lack of hawkish guidance disappointed investors. Following the decision, the yen fell sharply, prompting reports from the Nikkei newspaper that Japanese officials had conducted rate checks. This process involves authorities inquiring about currency quotes from banks to gauge market conditions, which is often seen as a precursor to intervention.
In other central bank news, both the Federal Reserve and the European Central Bank raised rates this month. Both institutions also warned that further tightening might be necessary to combat inflation, which has been influenced by the ongoing conflict in the Middle East. Fred Neumann, chief Asia economist at HSBC, noted that the BOJ's messaging has become more challenging due to the Fed's hawkish stance. He added that markets may continue to test the BOJ's resolve to raise rates and match the Fed's tightening pace.
The euro was largely unchanged at $1.1482, while the dollar index, which measures the US currency against six major peers, held steady at 100.23. The dollar index had gained over 1% last week following the Fed's rate hike and signals of further increases. Traders are currently pricing in a 55% chance of another Fed rate hike in October, up from 42.5% a week prior, according to CME FedWatch. Sterling was trading at $1.339, the Australian dollar at $0.7129, and the New Zealand dollar at $0.5721.