Yen Plummets as BOJ Downplays Near-Term Rate Hike

The yen tumbled over 2% after a Bank of Japan official signaled no near-term rate hikes, amidst a week of high market volatility driven by U.S. recession fears and unwinding carry trades. Investors are reassessing their strategies, responding to mixed signals from central banks and economic data.

The yen dropped sharply on Wednesday after a Bank of Japan official downplayed the chances of a near-term rate hike, adding a new twist to a week marked by significant market movements due to U.S. recession fears and the unwinding of popular carry trades. The currency was down over 2% at 147.69 per dollar, hitting session lows of 147.935 following comments from BOJ Deputy Governor Shinichi Uchida. The last time the yen fell this drastically was in March 2020.

Uchida emphasized the necessity of maintaining current monetary easing levels amidst volatile financial markets. His comments contrasted with Governor Kazuo Ueda's hawkish stance last week when the BOJ unexpectedly raised interest rates. Matt Simpson, a senior market analyst at City Index, questioned the need for such statements, suggesting it might signal no further hikes and a weaker yen.

The BOJ's rate hike last week, combined with early July interventions from Tokyo, prompted investors to exit carry trades, causing the yen to hit a seven-month high of 141.675 per dollar from a 38-year low of 161.96. However, Uchida's remarks could still support carry trades, according to investors. Rong Ren Goh, a portfolio manager at Eastspring Investments, noted that Japan's policy is a crucial factor in market risk structures, alongside U.S. economic data that influences Fed policy.

(With inputs from agencies.)