Dollar Takes a Hit as BOJ Keeps Policy Accommodative, Yen Soars

Dollar Takes a Hit as BOJ Keeps Policy Accommodative, Yen Soars

The U.S. dollar is trading lower in early European trade Wednesday, with the focus mainly on the falling Japanese yen after the Bank of Japan maintained its accommodative stance, bucking expectations for a hawkish policy shift. The Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower to 102.005, just above the seven-month low of 101.77 seen earlier in the week.

Yen Soars on BOJ Decision to Maintain Accommodative Stance

However, the day's spotlight is on the Japanese yen, with USD/JPY soaring 1.6% to 130.19 after the Bank of Japan maintained its short-term policy interest rate at negative 0.1%, and kept its long-term interest rate at 0%, as widely expected. The BOJ also said it will maintain the range of fluctuation in 10-year bond yields at between 0.5% and negative 0.5%, confounding expectations for a further adjustment in the rate, after the central bank unexpectedly widened the range in December.

Yen Rally Reversed but Further Adjustments to Yield Curve Control Policy Expected

The yen has rallied 14% in the past three months on expectations that the Bank of Japan will eventually move away from its super-easy stimulus policy, especially as inflation starts to rise significantly. Today's decision has reversed some of those gains, but most analysts think another adjustment to its yield curve control policy is just a matter of time and may come in April when there is a scheduled change of leadership at the central bank.

Mixed Reactions as Investors Digest Fresh Inflation Data and Dovish Signals from BOJ

European stock markets are expected to open in a mixed fashion Wednesday, as investors digest fresh inflation data out of the U.K. as well as dovish signals from the Bank of Japan. Consumer prices rose at an annual rate of 10.5% in the U.K. in December, a drop from 10.7% the prior month, while the monthly rate climbed 0.4%, unchanged from November. Although this level remains highly elevated, the reduction in the annual figure plays into the wider narrative that inflation has peaked in the West, and central banks can look at reducing the pace of their interest rate hikes.

Asian Markets Receive Positive Handover from BOJ Decision to Maintain Accommodative Policy

European equities received a largely positive handover from Asia Wednesday, after the Bank of Japan maintained its current range of yield curve control, confounding market expectations for more widening in the bank’s target range, which could have resulted in a tightening of monetary policy. The central bank maintained interest rates at record-low levels and said it will keep policy accommodative for the time being.

Oil Prices Rise on Increased Optimism for Chinese Demand

Oil prices rose Wednesday, extending the previous session’s gains on increased optimism that the removal of the COVID restrictions from the Chinese economy will result in a sharp recovery in the demand for fuel in the largest consumer of crude this year. The Organization of Petroleum Exporting Countries left its global oil demand forecast unchanged at a rise of 2.22 million barrels per day in a monthly report, released on Tuesday, but said Chinese oil demand would grow 510,000 barrels per day this year after contracting for the first time in years in 2022.