Yen weakens before BOJ decision as dollar firms on revived risk appetite

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Yen weakens before BOJ decision

Highlights

The yen trades 0.16% weaker at 157.73 per dollar ahead of Friday's BOJ meeting, with markets seeing better-than-even odds of a December rate hike.
Japan's service-sector inflation gauge rises 3.7% year-on-year in September, reinforcing expectations that the BOJ will maintain its tightening bias to achieve its 2% inflation target.
The dollar index holds near a one-week high at 102.04 as tech-led Wall Street gains and euro weakness, including EUR/USD at $1.1165, bolster broader risk sentiment.

Central bank outlook drives currency moves

As reported by Reuters, the yen is trading 0.16% weaker at 157.73 per dollar on Tuesday, extending losses after retreating from the one-month high it reached last week before the Bank of Japan's policy decision due on Friday.

The BOJ is widely expected to leave interest rates unchanged at 1.25% at the end of its two-day meeting, while signalling that it remains prepared to keep raising borrowing costs as price pressures build. Data released on Tuesday show Japan's service-sector inflation gauge rises 3.7% in September from a year earlier, reinforcing expectations that the central bank stays on course for further rate increases.

Analysts at MUFG say they expect the BOJ to conclude that underlying consumer inflation is broadly consistent with its 2% price stability target. They add that policymakers are shifting away from focusing mainly on downside inflation risks and toward monitoring risks in both directions.

Markets are pricing slightly better-than-even odds of a December BOJ rate increase, according to Ebury analysts, leaving room for the yen to rebound if Governor Kazuo Ueda adopts a more hawkish tone. Beyond Japan, the Federal Reserve is seen keeping rates unchanged on Wednesday, while the European Central Bank is also expected to hold at 2.5% on Thursday and the central banks of New Zealand and Canada are expected to raise rates this week.

Dollar strength reflects broader risk revival

The dollar index is holding near a one-week high at 102.04 as a technology-led rebound on Wall Street revives appetite for risk. Investors are also watching upcoming megacap earnings and the U.S. midterm elections for further direction.

Risk sentiment improves after Anthropic's IPO filing and Meta's $95 billion equity plan revive enthusiasm around artificial intelligence trades. That shift reduces demand for haven currencies such as the yen, which had been one of the best-performing major currencies last week when equity-market unease pushed investors into safer assets.

The dollar is also drawing support from euro weakness, with the single currency slipping to a near two-week low at $1.1165 and falling about 1.4% this month. Concerns over France's fiscal position are adding pressure after a selloff in French government bonds drives the country's debt-risk premium to its highest level since the 2011 sovereign debt crisis, reviving worries about broader financial stress across the euro zone.

Elsewhere, Brazil's real is stabilising after a sharp selloff against the U.S. dollar following President Luiz Inacio Lula da Silva's victory for a fourth term on Sunday over Senator Flavio Bolsonaro.

France’s efforts to rein in its budget deficit and calm bond markets have been a key focus for investors amid political uncertainty and rising borrowing costs. In our earlier coverage, we explained how concerns over passing a credible budget plan pushed French government yields higher, raised fears of wider euro zone stress, and weighed on sentiment across French assets.

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