Dollar and Yen Steady Ahead of Central Bank Decisions

The dollar and yen traded within narrow ranges as traders anticipated key decisions from central banks. The Bank of Japan and Federal Reserve are set for midweek meetings, which may influence currency trends. Recent yen rallies and interest rate speculation have heightened market focus on these outcomes.

The dollar and yen traded within close ranges on Tuesday as traders anticipated key central bank decisions. The Bank of Japan and the Federal Reserve are both set for midweek monetary policy meetings, which could set the tone for the coming weeks. The Japanese currency took a breather from its recent rally as the BOJ began its two-day meeting on Tuesday, having surged more than 2% against the dollar last week.

Several factors have contributed to the yen's strength since hitting a 38-year low of 161.96 against the dollar earlier this month, including a global stock market decline and heightened expectations for Japan's central bank to hike interest rates. Market sentiment is currently pricing in a 63% chance of a 10 basis points hike from the BOJ.

The BOJ has indicated plans for quantitative tightening, anticipating a gradual reduction of monthly bond purchases over a two-year period. However, questions remain about whether the BOJ will raise rates on Wednesday amid sluggish economic growth. Market analyst Matt Simpson of City Index cautioned that the real risk from the BOJ might be no rate hike and a weaker yen, given their tendency to undershoot expectations.

The greenback saw a slight 0.08% increase against the yen, fetching 154.125. Andy Ji, senior Asia FX strategist at InTouch Capital Markets, noted that if the BOJ skips a rate hike, the dollar would likely find near-term support at current levels. While narrowing interest rate differentials have relieved some pressure on the yen, Ji suggested that the still significant U.S.-Japan yield differential might pose resistance to the yen rally.

Meanwhile, the Federal Reserve is expected to maintain current rates on Wednesday, though markets are betting on rate cuts starting in the September meeting. Investors will be keenly listening for any hints from Fed Chair Jerome Powell on potential rate cuts during his press conference. Failing to signal a September rate cut this week could result in a strengthening of U.S. Treasury yields and the dollar.

The dollar index, a measure against a basket of currencies, remained little changed. The Bank of England also faces uncertainty regarding its first interest rate cut since 2020, with sterling seeing minor fluctuations. Elsewhere, the Australian dollar rose slightly ahead of a key inflation report, while the kiwi inched off multi-month lows. In the world of cryptocurrencies, bitcoin saw a slight decline.

(With inputs from agencies.)