The dollar approached a two-year high on Thursday after the Federal Reserve signaled a slower pace of rate cuts for 2025, while the yen dipped following the Bank of Japan’s (BOJ) decision to keep rates unchanged.
As anticipated, the BOJ held interest rates steady, though a proposal from one dissenting board member to raise borrowing costs highlighted the bank’s trajectory toward tightening policy early next year.
The yen weakened more than 0.3% against the dollar, hitting a one-month low of 155.43, before slightly recovering to trade 0.28% lower at 155.24 per dollar.
“There’s no real surprise here, but the FOMC’s outcome yesterday has put the BOJ in a tough spot,” said Naka Matsuzawa, chief strategist at Nomura Securities in Tokyo. “The BOJ cannot lean too dovish without risking further yen depreciation, nor can they be overly hawkish without adding to global market uncertainties.”
Matsuzawa noted that the BOJ likely opted to delay a rate hike to avoid repeating July’s market turmoil when a more hawkish stance triggered a sell-off in yen-funded trades. “Postponing the decision was likely their only viable option for now,” he added.
Attention now shifts to BOJ Governor Kazuo Ueda’s press conference at 06:30 GMT for insights into the possibility of rate hikes in January or March.
Meanwhile, the Fed’s signal of a more gradual pace of rate cuts next year is expected to sustain the wide interest rate differential between the U.S. and Japan, keeping the yen under pressure.The ripple effects of the Federal Reserve’s hawkish stance on Wednesday continued to reverberate through markets, with currency movements particularly pronounced as traders scaled back expectations for rate cuts next year.
The U.S. dollar’s surge pushed several peers, including the Swiss franc, Canadian dollar, and South Korean won, to significant lows during early Asian trading on Thursday.
“This decision likely signals the start of an extended pause by the FOMC, even if it’s too soon to state this definitively,” said Nick Rees, senior FX market analyst at Monex Europe. “We now anticipate U.S. rates to remain unchanged at least through the first half of 2025. If accurate, this adjustment in market expectations should bolster the dollar in the months ahead.”
The Swiss franc dropped to a five-month low of 0.90215 per dollar, while the Canadian dollar slid to its weakest level in over four years at 1.44655 per U.S. dollar.
The South Korean won plunged to a 15-year low, and the Australian and New Zealand dollars both declined to over two-year lows.
In contrast, the dollar index held steady at 108.08, close to its two-year high of 108.27 reached earlier on Thursday.
Fed Chair Jerome Powell emphasized that future rate cuts depend on continued progress in reducing persistently high inflation. His repeated calls for caution sent global stocks tumbling and bond yields soaring.
Later on Thursday, the Bank of England (BoE) is set to announce its policy decision, with markets widely expecting it to maintain steady rates.Ahead of the decision, the pound remained near a three-week low, trading at $1.2584. Meanwhile, the euro gained 0.28% to $1.0379, recovering slightly from its sharp 1.34% drop in the previous session.
In Australia, the Aussie dollar touched a low of $0.6199 before edging up to trade 0.07% higher at $0.62225.
The New Zealand dollar fell to its lowest level since October 2022 at $0.5608, later recovering slightly to $0.5628.
The kiwi faced additional pressure from data released on Thursday showing that New Zealand’s economy entered a recession in the third quarter, strengthening the case for more aggressive rate cuts.
