Yen hands back gains, dollar waits on CPI

The yen nursed losses on Tuesday as traders walked back expectations for a Japan rate hike, while the dollar was waiting on US inflation data and a slew of central bank meetings. The dollar rose about 0.9 per cent on the yen overnight . At 145.96 yen it is about 3 per cent above a low touched last week after remarks on the challenging outlook from Bank of Japan Governor Kazuo Ueda were taken as a hint that a policy shift was imminent.

Bloomberg reported on Monday, citing sources, that BOJ officials see little need to rush out of negative rates, triggering a reversal of the yen's rally and gains in Japan's stock and government bond markets.

"Wages growth is still weak," Commonwealth Bank of Australia analyst Kristina Clifton pointed out in a note. "We do not expect the BOJ to end negative interest rates until Q2 24 at the earliest ... The wide differential between US and Japanese 10-year government bond yields can continue to support dollar/yen."

Other currency pairs were broadly steady with the euro at $1.0765 as the market focus turns on US inflation data, due at 1330 GMT, and beyond it to Wednesday's Federal Reserve policy decision. Sterling held at $1.2555. The Australian dollar , floated four decades ago on Tuesday, was kept to $0.6564 and the New Zealand dollar to $0.6122.

The dollar has been sliding since October's benign US inflation report but found a footing on upbeat jobs data published on Friday. The Fed is considered certain to hold rates at 5.25 per cent-5.50 per cent this week, putting the focus on the so-called dot plots for rates and Chair Jerome Powell's press conference.

Expectations for a March cut have ebbed, though May is seen as a better-than 3/4 chance. Economists polled by Reuters expect headline inflation to have been flat for November, and core inflation to keep steady at an annual pace of 4 per cent - well above the Fed's 2 per cent target.

"Overly exuberant 'pivot zealots' may be set up for stumbles over the markets-Fed expectations gap," said Mizuho economist Vishnu Varathan. "Of particular interest will be where the median rate forecast for 2024 lands," he said in a note. "Markets are banking on more emphatic cuts of (about) 100bp whereas the Fed may be more stoic with more measured reductions."

The European Central Bank, Bank of England, Norges Bank and the Swiss National Bank then all meet on Thursday, with Norway the only one considered a possible hiker. There is also a risk the SNB dial back its support for the franc in FX markets. The franc made an almost nine-year high on the euro last week and traded a little softer than that at 0.9455 francs to the common currency on Tuesday.