Yen set for best week in a month on bets on BOJ rate hike

SINGAPORE: The yen was poised for its strongest weekly performance in a month as expectations mounted that the Bank of Japan will raise rates next week, putting the dollar on the back foot ahead of Donald Trump’s return to the White House.

Comments from senior BOJ officials, along with Japanese data pointing to continued price pressures and strong wage growth, have helped boost market confidence that a rate shift is on the cards with an 80% chance traders will raise prices next week.

The yen has gained 1.5% against the dollar this week, its strongest weekly run since late November. It was last slightly weaker at 155.34 per dollar on Friday but was close to a one-month high of 155.10 on Thursday.

“Inflation and wage data suggest the BOJ may raise rates further, and the commentary also gives a hint,” said Charu Chanana, chief investment strategist at Saxo.

“However, the yen’s strength may be short-lived, especially if (BOJ Governor Kazuo) Ueda surprises again with a dovish commentary despite a rate hike.”

The euro was steady at $1.03035 and sterling was little changed at $1.22355 in early trading. That left the dollar index, which measures the U.S. currency against six other units, at 108.94, inches away from a more than two-year high touched earlier in the week.

The index is set for a 0.6% drop on the week, after traders began pricing in the prospect of two rate cuts this year following easing US core inflation data on Wednesday, which would snap a six-week winning streak. The Federal Reserve last month projected two rate hikes in 2025.

But Thursday’s data showed US retail sales rose in December, pointing to strong consumer demand and credit strength that should prompt the Fed to be cautious in its approach to rate cuts this year.

Fed Governor Christopher Waller said on Thursday that three or four rate cuts are still possible if economic data weakens further.

Markets are currently pricing in 41 basis points of cuts from the Fed this year, according to LSEG data — up from 37 basis points before Waller’s comments.

The benchmark Treasury 10-year yield was 4.612% in Asian hours. It fell more than 16 basis points this week, its weakest weekly performance in a month.

China’s economy will also be in focus for markets on Friday, with the release of gross domestic product (GDP) data. A Reuters poll forecast GDP grew 5.0% in October-December from a year earlier, faster than the 4.6% pace in the third quarter.

China’s yuan has been hovering near 16-month lows in recent weeks as investors brace for US tariffs and struggle with record low domestic yields and a slow economic recovery. The offshore yuan traded at 7.3456 per dollar.

Investors are also looking ahead to Trump’s inauguration speech on Monday to get a better understanding of his policy moves. The tariff and tax policies he has outlined so far are expected to boost growth but also be inflationary.