The dollar inched higher against the yen on Tuesday but remained below the previous day’s high, having taken a hit after dovish comments from a Federal Reserve policymaker reduced bets that the Fed would raise interest rates this month.
Investors now see less chance of a US rate hike next week after Federal Reserve Governor Lael Brainard on Monday warned against the Fed removing support for the economy too quickly.
“We can stick with our main scenario that the Fed won’t raise rates in September. All the talk about a possible rate hike in September turned out to be noise,” said Koichi Yoshikawa, executive director of finance at Standard Chartered Bank’s Tokyo branch.
Fed Funds rate futures; are now pricing in only about a 15 percent chance of a rate hike at the Fed’s next policy meeting on Sept 20-21, according to CME Group’s FedWatch Tool.
That was down from about 35 percent in late August, when some Fed officials openly discussed the possibility of a September rate hike.
Against the yen, the dollar inched up 0.1 percent to 101.96 yen, after falling 0.8 percent on Monday. The dollar remains below Monday’s intraday high of 102.82 yen.
The yen has been steadily rising so far this year as investors grow sceptical that the Bank of Japan’s massive stimulus over the past three years will have limited impact in boosting Japan’s inflation.
For now, the Japanese currency is likely to move between 100 and 103 yen before the BOJ’s policy meeting, to be held during the same two days as the Fed’s.
The BOJ is expected to unveil the results of a comprehensive review of its policy it had promised in July, in which many market players believe the central bank will indicate its preference for a steeper yield curve to cushion the blow on banks from negative interest rates.
Some market players think the BOJ will only announce the framework of future easing without making a major policy change such as cutting interest rates further.
The euro was little changed at $1.1234.
There was limited market reaction to the latest Chinese economic data, which provided further signs of an improvement in China’s economic activity.
China’s industrial output grew the fastest in five months in August and exceeded market expectations, while retail sales also expanded more than expected.
“There’s some relief about the economy and the concerns over China have receded a bit,” said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.
Murata said moves in the Chinese yuan bear watching, however, given the possibility that China’s trade surplus may start to shrink at a time when a decline in its foreign reserves point to a possible pick-up in capital outflows. Pressure on the yuan to weaken seems to be increasing somewhat, he added.
Data released last week showed that China’s imports unexpectedly rose in August, while its foreign reserves fell to the lowest since 2011.
Europe will see UK consumer and wholesale inflation data at 9:30 a.m. (0830 GMT) ahead of the Bank of England’s policy meeting later this week.
A high inflation reading could dampen expectations of further easing by the BoE and lift the British pound.
Sterling held steady at $1.3335, having risen from levels seen at the end of last week when it traded at $1.3270.