Yen weakens on last minute doubts about BOJ hike

By Brigid Riley and Sruthi Shankar

(Reuters) -The Japanese yen weakened on Tuesday as traders had some last minute doubts about whether the Bank of Japan would hike rates this week, while other majors held steady with Bank of England and Federal Reserve meetings also in focus.

The dollar was last 0.6% higher versus the yen at 154.93, with the euro up a similar amount at 167.59 yen.

The BOJ's two-day policy meeting is underway and it will announce its rate decision on Wednesday. There has been much anticipation that it will announce a rate increase, building on its hike in March, the first in 17 years.

Markets are currently pricing in slightly more than a 50% chance of a 10 bps hike.

"The market certainly has been quite excited about a rate hike, but economists and Bank of Japan watchers are far less certain," said Jane Foley, head of FX strategy at Rabobank.

"Everybody sees a risk of a move, but the surveys are suggesting only about 30% of economists are thinking that the economic conditions are ripe for a move as soon as tomorrow and I think that is probably what's been weighing on the yen versus the US dollar this morning," Foley added.

The wide gap between Japanese interest rates and those elsewhere have been hurting the yen, which dropped to near 38-year lows earlier in July.

Since then however, a slew of factors including likely official intervention, a sell-off in equities driving investors out of risk positions and a reassessment of once very popular carry trades have helped it rebound.

The BOJ has already said it will announce quantitative tightening (QT) plans, with the middle-of-the-road view calling for the bank to gradually halve its monthly bond purchases over a two-year period.

The Fed also meets on Wednesday and is widely expected to stand pat, although markets are betting the U.S. central bank will begin cutting rates at the following meeting in September.

Investors will be listening for any hints that Fed Chair Jerome Powell may drop at his news conference on how soon policymakers are prepared to cut rates.

Elsewhere on Tuesday, initial inflation data from European countries did little for the euro, which was up 0.08% on the dollar at $1.0827.

Spanish inflation was below expectations, though data from some German provinces was slightly higher.

The pound was flat on the dollar at $1.2858 with investors nervous about placing too large bets ahead of the Bank of England's Thursday meeting.

Market pricing sees it as roughly a coin toss whether the BoE cuts rates, not helped by radio silence from some key policy makers, partly due to rules in the run-up to July 4's election.

With the outcome so finely balanced the pound could see a substantial reaction whatever the decision.



Moves elsewhere were pretty calm. The Swiss franc was flat at 0.8865 per dollar and a fraction softer on the euro at 0.9598 to the common currency.

The Australian dollar rose 0.12% to $0.6556 ahead of a key inflation report due Wednesday that could make or break the case for another hike from the Reserve Bank of Australia.

Source: Investing.com