Yen gains after BOJ; AI selloff weighs on dollar

The Japanese yen was on track for a third consecutive daily gain on Friday, October 30. The Bank of Japan left interest rates unchanged but upgraded its inflation outlook. Meanwhile, the US dollar slipped as Treasury yields fell, according to Reuters reporting carried by CNBC and other outlets.

The BOJ held its main policy rate at 1.25%, as widely expected. It stressed that policy has entered a new, more hawkish phase. The bank said it is open to raising rates once every few months. Reports on the decision said the board vote was 8-1, with one member favouring a quarter-point increase. The bank also revised its inflation forecasts higher. Governor Kazuo Ueda said the board will debate rates at every meeting, December included, and will not commit in advance to a pace of increases. The BOJ last raised rates in June and September, Reuters reported.

The yen strengthened after the announcement. It touched a high of roughly 157.9 per dollar in some reports, and Reuters later had it trading around 157.5. Reuters said the currency was on course for a small monthly gain in October. Bloomberg's coverage, as summarised by one outlet, said the yen pared some gains because Ueda offered few fresh clues on the timing of the next rate move.

Market reaction was mixed. Joseph Trevisani, senior analyst at FXStreet, told Reuters that the market was a little disappointed in the BOJ. He said the yen was a little stronger but not as strong as it had been, and that the Fed bias was still countering what the BOJ was doing. Masahiko Loo, chief fixed income strategist at State Street Investment Management in Tokyo, described the meeting as a boring hold with a hawkish direction. He said the debate is no longer whether the BOJ normalises policy but where the terminal rate lands, and that his base case is around 1.75%.

The dollar was also under pressure from outside Japan. A fresh wave of selling in AI-related shares triggered demand for safe-haven assets. That demand bypassed the dollar, which tracked a rally in US Treasuries and lower yields. Lower yields reduce the return on dollar holdings, and on Friday that effect outweighed the dollar's usual tendency to benefit from risk aversion. The dollar index, which measures the US currency against a basket of peers, was around 101.8 to 101.9 in various Reuters updates. It was set for a monthly gain of roughly 0.3% to 0.4%, which would be its second straight monthly rise.

The euro also benefited from the weaker dollar. Barclays currency strategist Lefteris Farmakis said the euro's strength from the AI-led selloff may soon dissipate. He pointed out that euro zone growth is lagging that of the United States and that the region has no equivalent boost from the AI buildout. This is one analyst's view and not a certain outcome.

The BOJ's meeting wrapped up a week of central bank decisions. The European Central Bank, the US Federal Reserve and the Reserve Bank of New Zealand all left interest rates unchanged. Reuters said they were biding their time amid stubborn inflation and tightening financial conditions. The BOJ's decision fits that pattern in leaving rates on hold. However, its language about further increases and its higher inflation forecasts point to a tightening bias.

Other reports on the meeting said the BOJ judged underlying inflation to be roughly at its 2% target. Energy costs and import prices lifted by the weak yen were cited as adding to price pressure. Most analysts polled by Reuters expected a move to 1.5% in December, according to one report. The BOJ has not committed to any such move.

For currency markets, Friday's moves show how several forces are interacting. Policy expectations in Japan, US bond yields and shifts in global risk sentiment are all affecting the yen and the dollar at once. Market conditions can change quickly. Data releases, central bank communications and equity-market swings can all alter the picture. Nothing in Friday's moves guarantees what will happen next.

This article is for information only and is not financial advice.

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