By Rae Wee
SINGAPORE (Reuters) -The yen fell on Wednesday after the Bank of Japan kept interest rates unchanged as widely expected, while the dollar struggled to regain some lost ground ahead of the Federal Reserve’s policy decision later in the day.
The BOJ on Wednesday maintained its short-term interest rate target at 0.5%, underscoring policymakers’ preference to spend more time gauging how mounting global economic risks from higher U.S. tariffs could affect Japan’s fragile recovery.
The yen swung between losses and gains shortly after the decision, though later traded decisively lower. It last edged down 0.2% to 149.56 per dollar.
“The decision to leave monetary policy unchanged itself is not a surprise, so its impact on exchange rates is limited. However, the earlier-than-usual timing of the announcement seems to have led financial markets to initially interpret that the BOJ (did not consider) bringing forward a rate hike,” said Hirofumi Suzuki, chief FX strategist at SMBC.
Focus now turns to BOJ Governor Kazuo Ueda’s post-meeting briefing later in the day for clues on how soon the central bank could next raise rates.
“It is expected that he will once again emphasise that as wage trends remain aligned with the BOJ’s economic outlook – essentially ‘on track’ – the policy rate will be raised gradually,” Suzuki said.
In the broader market, currency moves were largely subdued as traders were hesitant to take on fresh positions ahead of the conclusion of the Fed’s March policy meeting later on Wednesday.
Overnight, Israeli airstrikes pounded Gaza and killed more than 400 people, U.S. President Donald Trump and Russian President Vladimir Putin failed to reach an agreement on a Ukraine ceasefire and Germany’s outgoing parliament approved plans for a massive spending surge.
The euro did scale a five-month high of $1.0955 in the previous session and last traded near that level at $1.0930.
Investors were optimistic the move in Germany could revive economic growth and scale up military spending for a new era of European collective defence.
“This is a historic fiscal regime shift, arguably the largest since German reunification,” said Robin Winkler, chief German economist at Deutsche Bank Research.
“Yet, as with reunification, a fiscal expansion does not guarantee success: the next government will need to deliver structural reforms to turn this fiscal package into sustainable growth.”
Sterling was down 0.12% at $1.2988, though remained not too far from its four-month high of $1.3010 hit in the previous session.
The risk-sensitive Australian dollar fell 0.06% to $0.6357 as investor sentiment stayed cautious, while the New Zealand dollar also slipped 0.19% to $0.5810.
Against a basket of currencies, the dollar ticked up 0.1% to 103.39, having hit a five-month low of 103.19 on Tuesday.
The dollar has fallen nearly 4% for the month, pressured by Trump’s erratic tariff moves and as fears of a recession in the world’s largest economy mount.
The Fed’s policy decision later on Wednesday will be crucial for investors eager to know what the central bank makes of Trump’s policies and their impact on the U.S. economy, and how that would translate to the rate outlook.
Fed policymakers are widely expected to keep rates on hold, and will also release new economic projections at the conclusion of the meeting later in the day.
Traders are currently pricing in nearly 60 basis points of Fed rate cuts by the year end.
“The March FOMC meeting will likely be all about policy uncertainty. The Fed will almost certainly stay on hold, emphasising patience over panic,” said analysts at Bank of America Securities.
“The (Summary of Economic Projections) forecasts and distribution of risks are both likely to reflect stagflation: weaker growth and higher inflation.”
(Reporting by Rae Wee; Editing by Shri Navaratnam, Lincoln Feast and Jamie Freed)
