Yen Rises Amidst Dollar Strength on BOJ Rate Hike Expectation
The yen emerged as the sole outperformer among G-10 currencies against the dollar on Tuesday. This appreciation reflects market anticipation of a potential interest rate hike by the Bank of Japan (BOJ) on Friday.
Despite broad gains for the greenback following President Trump's announcement of tariffs on Mexico and Canada, the Japanese currency strengthened by 0.5% to 154.78 against the dollar. This marked its strongest level since December 19.
The yen's advance underscores expectations of a rate increase at the BOJ's meeting this week. Overnight index swaps indicate a 92% probability of a hike at the conclusion of the January 23-24 policy meeting. According to sources familiar with the matter, central bank officials anticipate a favorable opportunity for a hike provided there are no significant negative surprises from the early stages of the Trump presidency.
At one point on Tuesday, the yen briefly dipped to 156.23, but swiftly recovered those losses. It traded 0.3% higher at 155.11 at 1:16 p.m. in Tokyo.
Charu Chanana, chief investment strategist at Saxo Markets in Singapore, attributed the yen's rebound to reduced volatility following President Trump's speech. This allowed the market to price in the increased likelihood of a BOJ rate hike.
A Bloomberg survey of economists also indicates a strong consensus, with nearly three-quarters expecting a rate increase on Friday. This shift in expectations was amplified following Governor Kazuo Ueda's comments last week, where he suggested that the board would discuss the possibility of a move.