SINGAPORE: The US dollar and most major currencies were flat in early trading on Monday, except for a decline in sterling, as a Japanese holiday and a host of upcoming central bank meetings dampened markets.
The Bank of Japan’s monetary policy meeting on Friday is the highlight of the week in Asia, after Governor Kazuo Ueda raised speculation about an imminent move away from ultra-loose policy.
In a week full of central bank meetings, decisions are also scheduled from the US Federal Reserve on Wednesday and the Bank of England on Thursday.
The yen stabilized against the dollar at 147.82 to the dollar, with markets closed in Japan on the occasion of a national holiday.
In the week following Ueda’s comments about an early move away from negative interest rates, it fell 1.3% and took losses for 2023 to more than 11%.
Carol Kong, economist and currency strategist at Commonwealth Bank of Australia, said she expected the yen to be volatile ahead of the policy meeting.
“In terms of the direction of travel, the dollar/yen could definitely go higher,” Kong said.
It’s possible that investors misinterpreted Ueda’s comments.
Although the recent wave of weakness in Japanese wages and potentially prices could also ease and push the Bank of Japan further away from its inflation target, the case for tightening the Bank of Japan’s policy is still not very strong, Kong said.
“This means that the dollar and the yen could rise, especially if Governor Ueda appears pessimistic and dashes hopes of policy tightening at the next meeting,” she said.
The dollar index fell slightly to 105.23, with the euro rising 0.11% to $1.0667. The British pound was last trading at $1.2397, up 0.06% during the day.
Most investors expect differences in economic growth and yields to support the dollar, especially against the euro.
The British pound has fallen about 6% against the dollar since mid-July, while the euro has fallen more than 5% as the labor market and economy in the United Kingdom and the eurozone economy slow.
The European Central Bank raised interest rates to 4% last week, but said this rise may be the last.
With Japan closed, no cash Treasuries were traded on Monday.
US Treasury yields rose, with US Treasury yields crossing the 5% threshold for two years and rising by 25 basis points this month, driven by higher government spending and expectations that the Federal Reserve will keep interest rates high for longer to curb inflation that remains above target.
Last week’s US retail sales data played a role, further reducing the odds of a recession. Futures are priced at just a 3% chance that the Federal Reserve will raise interest rates at the end of its two-day meeting next Wednesday.
“With continued strong growth and tentative evidence that the labor market and inflation are normalizing, officials are unlikely to be ready to send a signal that they are done raising interest rates,” analysts at Deutsche Bank Research wrote.
The Bank of England is likely to raise interest rates again this week, and markets are already looking forward to a pause in a massive tightening cycle that has policymakers worried about the economy slowing.
UK inflation figures for August are also due to be released on Wednesday, just before the meeting.
On the other hand, oil prices add a layer of complexity to the growth and inflation dilemmas facing central banks.
Oil is also on track for its biggest quarterly increase since Russia’s invasion of Ukraine in the first quarter of 2022.
Brent crude futures recorded a ten-month high above $93 a barrel on Friday, recording a third weekly gain due to tight supplies led by Saudi production cuts and some optimism about Chinese demand.