The Japanese yen saw some support as reports emerged that the Bank of Japan plans to increase its inflation forecasts in projections due this month.
The yen rose 0.4% to 132.13 against the dollar, remaining close to a seven-month high reached earlier in the week. While the Bank of Japan has no immediate plans to raise interest rates, the yen has gained strength since early December due to its unexpectedly hawkish tone in its final meeting of 2022. Markets are now considering the possibility of the bank ending its ultra-loose monetary policy later this year.
The path of U.S. monetary policy will also impact the unwinding of the Bank of Japan's policy. The minutes of the Federal Reserve's December meeting indicated that while policymakers supported a slower pace of interest rate hikes, they also wanted rates to remain higher for longer. This suggests less immediate pressure on Asian currencies and limited upside potential for most regional units in the coming months.
The dollar index and dollar futures showed a muted response to the minutes, as other data revealed that U.S. manufacturing activity contracted for a second consecutive month in December. The dollar has faced some headwinds recently due to the risk of a U.S. recession and expectations of smaller near-term interest rate hikes. Markets are anticipating a 25 basis point hike by the Fed in February.
The Indian rupee, Taiwan dollar, and Singapore dollar all saw minimal movement on Thursday, with less than 0.1% changes. The Thai baht bucked this trend, rising 0.3% following data that showed consumer inflation met expectations in December. The Chinese yuan also edged higher after data indicated that while business activity contracted again in December, the pace of contraction appeared to have slowed due to the relaxation of some anti-COVID measures.
Attention is now focused on a potential Chinese economic reopening as the country experiences a significant surge in COVID-19 cases.
Japanese Yen Gains Strength on Inflation Forecast Increase
The Japanese yen gained strength on Thursday as reports emerged that the Bank of Japan plans to increase its inflation forecasts in quarterly projections due this month. The yen rose 0.4% to 132.13 against the dollar, remaining close to a seven-month high reached earlier in the week.
The yen has been on an upward trend since early December following the Bank of Japan's unexpectedly hawkish tone in its final meeting of 2022. Markets are now considering the possibility of the bank eventually ending its ultra-loose monetary policy later this year, though it currently has no plans to raise interest rates.
The path of U.S. monetary policy will also impact the unwinding of the Bank of Japan's policy. The minutes of the Federal Reserve's December meeting indicated that while policymakers supported a slower pace of interest rate hikes, they also wanted rates to remain higher for longer. This could lead to limited upside potential for most regional units in the coming months.
The dollar has faced some headwinds recently due to the risk of a U.S. recession and expectations of smaller near-term interest rate hikes. Markets are anticipating a 25 basis point hike by the Fed in February.
