By Rae Wee
SINGAPORE (Reuters) – The dollar flirted with a two-year high on Thursday after the Federal Reserve signaled a slower pace of rate cuts in 2025, while the yen fell after the Bank of Japan (BOJ) remained firm on rates.
The Bank of Japan held interest rates steady on Thursday as expected, underscoring policymakers’ preference to spend more time examining whether wage increases will broaden and sustain inflation around its 2% target.
The yen fell immediately after the decision, weakening about 0.3% against the dollar to a one-month low of 155.28, before paring some of those losses.
The Japanese currency last traded 0.15% lower at 155.04 per dollar.
“So far, it’s no surprise, but I guess yesterday’s FOMC outcome put the BOJ in a sort of corner where the BOJ can’t be too dovish in order to prevent the yen from falling. At the same time, they can’t really too much are not aggressive either,” said Naka Matsuzawa, chief strategist at Nomura Securities in Tokyo.
The BOJ would not want to exacerbate current uncertainties in global markets, as they did in July, he said, referring to an episode in which the BOJ’s hawkish stance sparked a sell-off in yen-financed trades. “Therefore, postponing the correct decision on the increase this time was probably the only option they had now.”
A more measured pace of Federal Reserve cuts next year will keep U.S.-Japan rate differentials wide for some time and keep the yen under pressure.
In the broader market, the fallout from a hawkish stance by the Federal Reserve on Wednesday continued to reverberate across markets, with moves in currencies particularly pronounced as traders lowered their expectations for easing next year.
The US dollar’s rally sent its peers including the Swiss franc, Canadian dollar and South Korean won to record lows in early Asia trading on Thursday.
“We believe (the) decision marks the start of a prolonged pause by the FOMC, even if it is too early to say so explicitly,” said Nick Rees, senior foreign exchange market analyst at Monex Europe.
“We now expect US rates to remain unchanged, at least through the first half of 2025. If so, then an upward adjustment in market expectations should support the dollar’s rise in the coming months.”
It bottomed at a five-month low of 0.90215 per dollar, while the Canadian dollar sank to its lowest level in more than four years at 1.44655 per US dollar.
The won fell to its weakest level in 15 years, while the Australian and New Zealand dollars similarly fell to more than two-year lows.
In stark contrast, the pair stabilized at 108.05, close to Thursday’s two-year high of 108.27.
Federal Reserve Chair Jerome Powell said further reductions in borrowing costs now depend on further progress in reducing persistently high inflation, with his explicit – and repeated – references to the need for caution from now on. which also caused global stocks to fall and yields to rise.
The Bank of England (BoE) also announces its policy decision later on Thursday, where it is expected to keep rates unchanged.
Before the result, sterling was pegged near a three-week low of $1.25875. Meanwhile, the euro rose 0.23% to $1.0376, supporting its sharp 1.34% decline from the previous session.
In Australia, it bottomed at $0.6199, before recovering slightly to last trade up 0.11% at $0.6225.
The New Zealand dollar also hit its weakest level since October 2022 at $0.5608 and last bought $0.5623.
They were further pressured by data on Thursday showing New Zealand’s economy plunged into recession in the third quarter, cementing the case for more aggressive rate cuts.