Yen sags to 15-year low vs euro after BOJ rate decision

By Gertrude Chavez-Dreyfuss

LONDON/NEW YORK (Reuters) - The yen plunged to a 15-year low against the euro on Friday after the Bank of Japan (BOJ) kept its ultra-low interest rate policy and forecast that inflation will slow later this year, in contrast with the European Central Bank's (ECB) rate hike on Thursday.

The Japanese unit also fell against the greenback, dropping to a six-month trough.

As widely expected, the BOJ maintained its -0.1% short-term rate target and a 0% cap on the 10-year bond yield set under its yield curve control (YCC) policy.

BOJ Governor Kazuo Ueda said he expects inflation to moderate, but the "pace of decline is somewhat slow."

The yen fell broadly following the decision and hit a fresh 15-year low of 155.22 per euro. It was poised for its biggest weekly decline against the euro in three years. The euro was last up 1.1 at 155.16 yen.

The dollar rose 1.1% against the Japanese currency to 141.795, after earlier touching its highest since November. It was on pace for its largest daily percentage gain since late April.

"The Bank of Japan added fuel to that dollar fire today by being on hold again," said Erik Bregar, director, FX & precious metals risk management at Silver Gold Bull in Toronto.

Elsewhere, the euro was poised for its best week against the dollar since June after the ECB raised borrowing costs to a 22-year high and hinted at further tightening.

That and some soft U.S. data saw the dollar fall as traders scaled back bets on how high U.S. rates would need to rise.

The euro was flat against the greenback at $1.0940 after earlier touching a five-week high, having surged over 1% on Thursday following the rate hike and forward ECB guidance.

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

Sterling rose 0.4% to $1.2831 after earlier rising to its highest since April 2022, as traders ramped up bets the Bank of England will raise rates for the 13th straight meeting next week.

FED FACES GRIM DATA

The ECB's policy decision came a day after the Federal Reserve left rates unchanged, snapping a string of 10 consecutive hikes. However, the Fed also signalled that rates may still need to rise by as much as 50 basis points by the end of this year.

However, recent data showed U.S. economic activity is slowing and inflation is cooling, challenging the Fed's still-hawkish stance.

On Friday, data showed ebbing inflation expectations that lifted U.S. consumer sentiment to a four-month high in June. The survey's reading of one-year inflation expectations dropped to 3.3% this month from 4.2% in May.

In afternoon trading, the dollar index edged up 0.1% to 102.24, after falling to a five-week low on Thursday. It was on track for its weakest weekly performance since January.

"Beyond July, we don't think there's going to be another hike, but the first cut would be in December," said Vassili Serebriakov, FX strategist at UBS in New York.

"We think the economy is going to slow meaningfully in the second half, with inflation coming in below what the Fed is expecting."

Also on Friday, the U.S. Treasury said it found that no major U.S. trading partners had manipulated their currencies for an export advantage, adding it ended "enhanced analysis" for Switzerland after the country met only one of three manipulation criteria.

The FX market showed little reaction to the news.

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Currency bid prices at 3:45PM (1945 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 102.2600 102.1400 +0.13% -1.189% +102.4200 +102.0000

Euro/Dollar $1.0941 $1.0946 -0.03% +2.12% +$1.0971 +$1.0918

Dollar/Yen 141.7650 140.3000 +1.05% +8.13% +141.8800 +139.8500

Euro/Yen 155.12 153.52 +1.04% +10.56% +155.2200 +153.1000

Dollar/Swiss 0.8939 0.8920 +0.23% -3.31% +0.8949 +0.8902

Sterling/Dollar $1.2831 $1.2783 +0.39% +6.11% +$1.2848 +$1.2771

Dollar/Canadian 1.3192 1.3222 -0.22% -2.63% +1.3239 +1.3178

Aussie/Dollar $0.6875 $0.6883 -0.11% +0.87% +$0.6900 +$0.6856

Euro/Swiss 0.9778 0.9758 +0.20% -1.18% +0.9782 +0.9747

Euro/Sterling 0.8526 0.8561 -0.41% -3.60% +0.8565 +0.8522

NZ $0.6232 $0.6235 -0.03% -1.83% +$0.6247 +$0.6211

Dollar/Dollar

Dollar/Norway 10.5430 10.4910 +0.54% +7.48% +10.6070 +10.4810

Euro/Norway 11.5415 11.4805 +0.53% +9.99% +11.5975 +11.4708

Dollar/Sweden 10.6478 10.5974 +0.59% +2.31% +10.6588 +10.5609

Euro/Sweden 11.6514 11.5825 +0.59% +4.50% +11.6585 +11.5828