Dollar eases as Treasury rally offsets BOJ decision focus
Currency markets are holding a cautious tone as investors await the Bank of Japan's policy decision at the end of a busy week for major central banks. A fresh selloff in AI-linked shares is also driving demand for safer assets, pulling U.S. Treasury yields lower and limiting support for the dollar.
Highlights
- Yen weakens to 157.815 per dollar before the Bank of Japan decision, tracking a 0.2% monthly decline as rates are expected to remain at 1.25%.
- Euro holds at $1.1185 after hitting its lowest since May 2025 and is set for a 1.2% monthly drop, while sterling rises 1% over the month.
- Global central banks including the ECB, Fed, and Reserve Bank of New Zealand maintain rates, with market participants anticipating the tightening cycle may persist if inflation stays high.
Central bank outlook and currency moves
As reported by Reuters, the yen is steady ahead of the Bank of Japan's policy decision, with markets widely expecting the central bank to keep interest rates unchanged at 1.25% despite elevated inflation pressures. Investors are also pricing in about an 80% chance of a rate increase in December, while expectations remain for a hawkish tone from policymakers.The yen weakens slightly to about 157.815 per dollar and is on track for a 0.2% monthly decline against the U.S. currency. The BOJ is set to close out a week of major central bank meetings after the European Central Bank, the U.S. Federal Reserve and the Reserve Bank of New Zealand all leave rates unchanged as they weigh stubborn inflation and tighter financial conditions.
ANZ head of Asia research Khoon Goh says the pause in policy tightening looks temporary and that the global tightening cycle is likely to continue to drive foreign exchange markets. He says the key question heading into 2027 is whether further rate increases may be needed if inflation remains elevated.
The euro is flat at $1.1185 after briefly touching its lowest level since May 2025 in the previous session and is on track for a 1.2% monthly fall. Sterling adds 0.1% to $1.3390 and is up 1% for the month, while the Australian dollar is little changed at $0.7030 and the New Zealand dollar slips slightly to $0.5626.
Our earlier article on UBS’s outlook for the Federal Reserve tightening cycle explained why the bank expects additional rate hikes in December and again in March 2027 as inflation pressures prove more persistent than anticipated. We also noted that futures markets were increasingly pricing in “higher-for-longer” policy, reinforcing expectations of tight financial conditions that can keep currency markets sensitive to central-bank guidance.
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