The yen slipped in choppy trading on Friday after the Bank of Japan delivered a widely expected interest rate hike, while Governor Kazuo Ueda offered limited guidance on the timing of future increases, even as he kept the door open to further monetary tightening.
The yen initially weakened against the dollar after the Bank of Japan raised its policy rate to 0.75% from 0.5%, a move that had been clearly signaled by policymakers, prompting traders to sell the currency on the news.
Losses in the Japanese currency deepened following Ueda’s post-meeting press conference, where he remained vague about the precise timing and pace of future rate hikes. In its latest trading, the yen was down 0.6% at 156.53 per dollar.
The euro climbed to a record high of 183.25 yen, while sterling rose 0.52% to 209.16 yen.
In a statement on Friday, the Bank of Japan maintained its view that core inflation will converge toward its 2% target in the second half of the three-year forecast period through fiscal year 2027.
However, two more hawkish board members, Hajime Takata and Naoki Tamura, dissented. Takata said core inflation had already reached the target, while Tamura argued it would do so earlier, around the middle of the three-year outlook period.
Bart Wakabayashi, head of Tokyo trading at State Street, commented on the Bank of Japan’s decision earlier on Friday, saying: “It feels like there is an ongoing debate, and the market reaction we’re seeing, in my view, is really about the Bank of Japan’s next steps… It doesn’t look like they have fully made up their minds about another hike.”
He added: “I think there is some consensus that 1% or 1.25% is roughly the neutral rate at this stage, but it appears the path for the Bank of Japan to get there will be a bit steeper.”
The Bank of Japan reiterated that real interest rates remain at “significantly low” levels even after the hike, and pledged to continue tightening if economic and inflation conditions evolve in line with its projections.
Euro steadies as Lagarde pushes back against hawkish pressure
Overnight, the dollar briefly weakened following a sharp and unexpected drop in US inflation, but investors questioned the reliability of the data due to disruptions caused by the US government shutdown, and the move quickly faded.
Sterling swung between gains and losses before settling at $1.3374, after the Bank of England cut interest rates to 3.75% as expected. However, the decision was passed by a narrower majority than markets had anticipated, potentially limiting the scope for further easing.
The euro was steady at $1.1719 in Asian trading, after European Central Bank President Christine Lagarde refrained from offering forward guidance and said all options remained on the table, a stance that markets interpreted as a pushback against more hawkish voices.
Analysts at ANZ said in a note to clients: “In recent weeks, hawkish comments from ECB executive board member Schnabel have shifted the market’s assessment of future policy risks. But the balanced tone suggests that Schnabel’s view that the next move is more likely to be a rate hike does not have broad support within the council.”
The ECB kept its policy rate unchanged at 2%, in line with expectations.
On the political front, European Union leaders agreed on Friday to borrow funds to finance Ukraine’s defense against Russia over the next two years, instead of using frozen Russian assets, sidestepping disagreements over an unprecedented plan to fund Kyiv with Russian sovereign money.
Norway and Sweden hold rates steady
The Norwegian krone slipped slightly to 10.18 per dollar after the central bank kept interest rates unchanged at 4% and signaled it was in no rush to cut them. The Swedish krona showed little reaction after rates were also left unchanged, as expected.
The Australian dollar fell 0.2% to $0.6601, while the New Zealand dollar declined 0.5% to $0.5748.
The Chinese yuan remained firm in onshore trading, hovering near a more-than-one-year high reached on Thursday. The dollar index rose 0.2% to 98.64.
Cryptocurrencies rebounded on Friday, with bitcoin up 2.5% at $87,752.22, while ether climbed more than 4% to $2,951.26.
