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Yen struggles before BOJ decision; hawkish ECB, soft US data dent dollar

By Rae Wee

SINGAPORE (Reuters) – The yen languished near a 15-year low against the euro and around a seven-month trough against the dollar on Friday, ahead of a closely-watched policy decision by the Bank of Japan, where it is set to stay ultra-dovish in the face of its hawkish peers.

The euro was poised for its best week since November after a hawkish European Central Bank (ECB) signalled further rate hikes to come, after raising borrowing costs to a 22-year high overnight. That and a run of soft U.S. economic data saw the dollar fall broadly as traders scaled back their bets on how high U.S. interest rates would need to rise.

The Japanese yen was last just over 0.1% higher at 140.09 per dollar, having bottomed at 141.50 per dollar in the previous session, its lowest since November.

Against the euro, the yen last bought 153.40, not far from Thursday’s 15-year low of 153.685 per euro. The Japanese currency was likewise pinned near an over seven-year low against the British pound at 178.34.

READ MORE: Dollar scales 6-month peak against yen on US rate expectations

“The widespread weakness in the Japanese yen mainly reflects expectations for the Bank of Japan to stand pat today and probably in coming months in terms of its monetary policy settings,” said Carol Kong, a currency strategist at the Commonwealth Bank of Australia.

The BOJ is due to announce its monetary policy decision later on Friday after its two-day meeting, with investors widely expecting the central bank to maintain ultra-low rates.

“Expectations for no change at the June meeting appear well anchored, so the market reaction will likely be muted in such a scenario,” said Allianz Global Investors’ global head of multi-asset Gregor Hirt and portfolio manager Stefan Rittner.

Elsewhere, the euro stood near a one-month high at $1.0947, having surged over 1% on Thursday following the rate hike and hawkish forward guidance from the ECB.

ECB President Christine Lagarde told a press conference that another rate hike in July was highly likely and that the central bank still has “ground to cover” to stave off high inflation.

“The biggest hawkish surprise was the upward revision to 2024 and especially 2025 inflation forecasts,” said economists at Deutsche Bank in a note.

“Our baseline expectation is a final 25bp hike in July to a terminal rate of 3.75%. The risks remain clearly to the upside.”

Sterling rose to an over one-year peak of $1.2794 in early Asia trade, as traders similarly ramped up bets that the Bank of England is likely to raise interest rates for the 13th meeting in a row next week.

FED HAWKISHNESS CHALLENGED

The ECB’s monetary policy decision came a day after the U.S. Federal Reserve left interest rates unchanged, snapping a string of 10 consecutive rate hikes, though it signalled that borrowing costs may still need to rise by as much as half of a percentage point by the end of this year.

But a string of data out on Thursday had markets challenging that view, as economic activity in the United States slows and inflation cools.

Production at U.S. factories almost stalled in May as manufacturing struggled under the weight of higher interest rates, while U.S. import prices similarly fell last month.

READ MORE: US dollar, yen gain as risk appetite sours

A separate report from the Labor Department showed initial claims for state unemployment benefits were unchanged at a seasonally adjusted 262,0000 for the week ended June 10, above economists’ forecast for 249,000 claims.

U.S. retail sales unexpectedly rose in May, however, as consumers stepped up purchases of motor vehicles and building materials.

The greenback slipped in the wake of the data releases and tumbled to a one-month low of 102.08 against a basket of currencies on Thursday. The dollar index last stood at 102.17 in early Asia trade.

In other currencies, the Australian dollar last bought $0.68775, not far from near four-month highs of $0.6893 hit in the previous session.

The Kiwi rose 0.06% to $0.6239.

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