Yen bides time with BOJ in focus, dollar steady

The yen languished near a two-month low on Tuesday ahead of a closely-watched policy decision by the Bank of Japan (BOJ) where expectations are for the central bank to stand pat on its ultra-loose monetary policy settings.

Elsewhere, the US dollar held broadly steady while its New Zealand counterpart slipped to a two-month low of $0.60625, pressured by strength in the greenback and China's murky economic outlook.

The yen was last fetching 148.13 per dollar, not too far from last week's roughly two-month trough of 148.80, as it continues to be weighed down by the stark interest rate differentials between Japan and the United States.

The BOJ concludes its two-day monetary policy meeting on Tuesday, though any expectations for a phasing out of its negative interest rate policy this month have been quashed in the wake of the country's devastating New Year's Day earthquake and dovish comments by BOJ Governor Kazuo Ueda.

"I don't think it is live," said Carol Kong, currency strategist at Commonwealth Bank of Australia, referring to Tuesday's policy decision. "I think the earthquake in Japan... really shifted market expectations toward the BOJ not normalising policy any time soon.

"So I don't think today is going to bring any surprises in terms of the interest rate and (yield curve control) policy." Focus will also be on the central bank's set of economic projections in its quarterly outlook report.

"Markets will closely watch whether the BOJ will revise up the 2025 CPI forecast towards the 2 per cent target or keep it steady at 1.7 per cent," said Kong. "What that number prints will signal a lot about whether or not the BOJ sees the lift in inflation being sustainable."

The European Central Bank (ECB) also meets this week, where expectations are similarly for its deposit rate to be held steady at 4.00 per cent.

ECB policymakers, including President Christine Lagarde, have pushed back against market expectations for early rate cuts. That's helped the euro a little, with the single currency having traded largely sideways over the past few sessions. It eased 0.06 per cent to $1.0879 in early Asia trade.

EASING PROSPECTS

Across the broader market, the kiwi was last at $0.6074, struggling pull away from its two-month trough. "The (New Zealand dollar) has emerged as the weakest currency in G10 FX of late, and this can partly be explained by negative sentiment towards China, but also recent New Zealand data flow has underwhelmed," said Chris Weston, head of research at Pepperstone.

The country's fourth-quarter inflation reading is due on Wednesday, which will provide further clarity on how soon the Reserve Bank of New Zealand (RBNZ) could begin easing rates.

"A downside surprise would likely bring forward expectations of the first 25bp rate cut from May to the April RBNZ meeting," said Weston.

Against the dollar, sterling slipped 0.03 per cent to $1.27075, while the Australian dollar tacked on 0.06 per cent to $0.6574.

The dollar index steadied at 103.36, not too far from an over one-month high of 103.69 it hit last week, as traders pare back their expectations for a rate cut by the Federal Reserve in March.

That's kept US Treasury yields supported, with the two-year yield last at 4.3847 per cent, up more than 25 bps from its January low of 4.1190 per cent.

The benchmark 10-year yield likewise settled above 4 per cent and was last at 4.0976 per cent.
"We look for the FOMC to remain in a holding pattern, not only with the Fed funds rate at its January meeting, but also with its policy guidance," said economists at Wells Fargo ahead of next week's Fed meeting.

"While progress in lowering inflation over the past six months has built the case that rate cuts are coming, the economy's recent performance suggests no imminent need to ease."

In cryptocurrencies, bitcoin fell 0.24 per cent to $39,720, after slipping below the $40,000 level in the previous session for the first time since the launch of 11 spot bitcoin exchange-traded funds on Jan. 11.