The yen is set for its biggest weekly gain in a month as interest rate differentials between Japan and Japan narrow
The yen was on track for its biggest weekly gain in four months against the dollar on Friday as interest rate differentials between Japan and Japan looked set to narrow, while bets that the Federal Reserve had finished raising interest rates put the greenback on track for a weekly decline.
The dollar last traded at 150.67 yen, still above the critical 150 level and not far from a one-year low of 151.92 hit on Monday.
A slew of weaker-than-expected US economic data this week, most notably a slowdown in inflation, has reinforced expectations that the Federal Reserve has ended its aggressive monetary tightening cycle and is now focused on when it might start cutting interest rates for the first time.
The market is pricing in just a 0.3 per cent chance of another rate hike in December, compared with about 15 per cent a week ago, and a 35 per cent chance that the Fed will begin easing policy as early as March, according to CME Group's FedWatch tool.
That has sent Treasury yields lower and the dollar down with them, with the greenback down nearly 0.6 per cent against the yen this week, on track for its worst weekly performance since July.
Mr Kellow, senior currency strategist at Westpac, said: "The market reaction to the US CPI is very big and the data is a bad signal for the future direction of the dollar. This could lead to the argument that the market starts talking about the December FOMC statement as not only holding fire, but... They may take a more neutral stance."
While US interest rates may have peaked and even insiders believe the Bank of Japan is preparing the market for the end of negative rates, the wide gap between ultra-low rates in Japan and those in the US continues to weigh on the yen.
"I think the Bank of Japan is still going to be cautious," Mr Kelo said. Our view is that they won't touch policy setting for many, many months, until very late next year. If that's the case, then the yield appeal of the dollar could diminish, but we don't think it's enough to really reverse the trend - the (interest rate) gap is still wide."
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