Currencies calm but cautious after a weary week

The yen hit 154.70 per dollar, not far from last week's 34-year low of 154.79 and close enough to the 155-level that is next on traders' alerts for possible intervention by Japanese authorities.

The dollar's trade-weighted index was above 106, but off five-month highs it struck last week after comments from Federal Reserve officials and a run of hotter-than-expected data forced a paring back of rate cut expectations.

A cooling in Middle East tensions, which had driven the dollar, gold and crude oil prices sharply higher on Friday and battered stock markets, also helped temper volatility. Tehran downplayed Israel's retaliatory drone strike against Iran, in what appeared to be a move aimed at averting regional escalation.

"There will be a focus on the BOJ meeting, but it is too soon for them to alter policy, and the market gives a change in rates no chance at all," said Chris Weston, head of research at Pepperstone.

Referring to Japanese rates swaps, Weston said he sees "no change priced for this meeting" but a hike of 10 basis points priced by July and 25 bps priced by December.

The strong dollar prevailed at last week's International Monetary Fund/World Bank spring meetings in Washington too, and the United States, Japan and South Korea issued a rare joint statement on the issue.

Speaking after the Group of 20 (G20) finance leaders' meeting in Washington, Bank of Japan Governor Kazuo Ueda said the Japanese central bank may raise interest rates again if the yen's declines significantly push up inflation, highlighting the dilemma the weak currency has become for policymakers.

The yen has been one of the biggest losers against the dollar this year, with losses mounting to 9%.

Yet, while the rethink on Fed easing has led to a general repricing of global rate cut timelines, expectations for the European Central Bank (ECB) and Bank of England (BoE) to start cutting by mid-year are still intact.

ECB policymaker Madis Muller said on Friday the central bank could cut interest rates "a few more" times by the end of the year after a first move in June if inflation behaves as expected, similar to what ECB President Christine Lagarde had hinted last week, while not pre-committing to any rate path.

The ECB's Robert Holzmann, however, said the ECB probably will not cut rates this year as much as planned if the Fed does not move.

BoE Governor Andrew Bailey and Deputy Governor Dave Ramsden alluded last week to Britain's inflation slowing as expected. Sterling hit $1.2367, a mid-November low, on Friday. It was last at $1.2383.

Analysts do not see too much room for U.S. Treasury yields to rise further, given the light economic data calendar for the rest of the month and how far they have already risen as investors reprice Fed expectations.

Two-year notes have seen yields climb 38 basis points this month to current five-month high levels around 5.0070%.

Bitcoin was last up 1% at $64,832. The world's largest cryptocurrency completed its "halving" on the weekend, a phenomenon that happens roughly every four years and aims to reduce the rate at which bitcoins are created.

Source: Forex-Markets-Economic Times