By Kevin Buckland and Greta Rosen Fondahn
TOKYO/GDANSK (Reuters) -The yen touched an eight-week high versus the dollar on Thursday after a Bank of Japan policy board member advocated continued interest rate hikes, while sterling slid as the Bank of England eased policy.
The pound fell 1% to $1.2376, its biggest one-day slump since January 2, after the Bank of England cut interest rates as expected, but forecast higher inflation and weaker growth, with two officials calling for an even larger rate cut.
Sterling had touched a one-month high at $1.2437 only the day before.
Money markets now price in around 67 bps of further BoE easing by the end of the year.
The dollar index was up against a basket of peers at 108, but it still hovered near the lowest level since the start of last week, with investors beginning to entertain prospects that a global trade war could be averted.
In the absence of tariff headlines, markets looked ahead to Friday’s key U.S. monthly payrolls figures, the next major test for the U.S. monetary policy outlook.
The dollar index hit a two-year high of 110.17 on January 13, but has since retreated 2%.
“Driving this correction have been several factors, the largest of which has probably been this week’s tariff news, where it looks like the Trump administration has been using tariffs for transactional not ideological purposes,” said Chris Turner, global head of markets at ING.
U.S. President Donald Trump suspended planned tariff measures against Mexico and Canada this week, but imposed additional 10% levies on imports from China.
“Yet we doubt the dollar correction will last too long. We look for more structural and broader tariffs to come back into play in the second quarter,” said Turner.
YEN STRENGTH
The yen strengthened as far as 151.81 per dollar – the strongest level since December 12 – in the Tokyo morning, after the BOJ’s Naoki Tamura said the central bank must raise rates to at least 1% or so in the latter half of fiscal 2025 with upward risks to prices rising.
Japan’s currency was last changing hands at 152.31 per dollar, up 0.18% on the previous day, paring some of the early gains after Tamura clarified that he didn’t mean that the neutral rate should be 1%.
“Tamura is known to be on the hawkish side,” although his comments initially “fired up yen longs”, said Shoki Omori, chief global desk strategist at Mizuho Securities.
At the same time, “the main factor for the yen going richer is geopolitics,” Omori added.
“I think there’s more to come from POTUS that makes markets nervous,” he said, referring to Trump.
The market is currently pricing in a quarter-point BOJ rate hike by September.
Conversely, a quarter-point Fed cut is fully priced for July, with markets expecting a total of 46 basis points of reductions by the December meeting, according to LSEG data.
U.S. Treasury Secretary Scott Bessent said on Wednesday that while Trump wants lower interest rates, he will not ask the Federal Reserve to cut rates.
The offshore yuan weakened slightly to 7.2934 per dollar.
Canada’s loonie slipped 0.3% to C$1.4354 versus its U.S. counterpart after rising to the highest since December 17 at C$1.4270 overnight. The Mexican peso was little changed at 20.57 per dollar.
The euro edged down 0.4% to $1.0361.
(Reporting by Kevin Buckland and Greta Rosen Fondahn. Editing by Shri Navaratnam, Mark Potter and Susan Fenton)
