Forex traders were ramping up bets on Monday that the Bank of Japan will further adjust its yield control policy at a meeting due to be held this week.
The dollar fell to a seven-month low against major peers, while the yen rose to its highest in more than seven months.
The Aussie dollar breached the key $0.7000 level for the first time since August, after rising as high as $0.7019 earlier in the session.
Similarly, the euro hit a fresh nine-month top of $1.0874.
Against a basket of currencies, the US dollar index slumped to a seven-month trough of 101.77, as the greenback extended its selloff from last week after data showed that US consumer prices fell for the first time in more than 2.5 years in December.
Smaller US rate hike seen
With decades-high inflation in the world’s largest economy showing signs of cooling, investors are now growing increasingly confident that the Fed is nearing the end of its rate-hike cycle, and that rates would not go as high as previously feared.
“The confirmation of a deceleration in price pressures is building up hopes that CPI could fall further in coming months,” analysts at OCBC said.
“An entrenched disinflation trend can reinforce expectations that the Fed could again scale back on its pace of hike beyond the February FOMC or even position for an earlier pause or dovish pivot.”
The Fed’s aggressive rate increases have been a huge driver of the greenback’s 8% surge last year.
Markets are now pricing in a 91% chance of a 25 basis point increase when the Fed announces its policy decision in February, with a 9% chance of a 50 bp increase.
BOJ could abandon yield control
The Japanese yen rose to a more than seven-month peak on Monday, as market sentiment was dominated by expectations that the BOJ would make further tweaks to, or fully abandon, its yield control policy when it announces its monetary policy decision on Wednesday.
The yen jumped roughly 0.5% to a high of 127.215 per dollar, and last bought 127.67 per dollar.
“I think the whole world will be focused on Wednesday … and probably the week in G10 (currencies) will be defined by what happens to the yen and yen crosses, out of that,” said Ray Attrill, head of FX strategy at National Australia Bank (NAB).
“I don’t think (the BOJ) has the luxury of time to say that they’re going to assess and wait until Q2 or Kuroda to see out his term without making any further changes.”
Current BOJ Governor Haruhiko Kuroda will step down in April.
Investors have been pressing for the BOJ to shift away from its ultra-easy monetary policy, which caused the yield on Japan’s benchmark 10-year government bonds to breach the central bank’s new ceiling for two sessions.
The BOJ’s yield curve control policy contributed to the yen’s 12% slump last year, and since the central bank’s shock decision last December to widen the band around its yield target, the yen has jumped more than 6%.
Elsewhere, the British pound was last 0.23% higher at $1.2262, after earlier hitting a one-month peak of $1.2288.
The kiwi rose 0.34% to $0.64065, having also touched a one-month top of $0.64255 earlier in the session.
US markets are closed on Monday for a holiday, making for thin trading.
- Reuters with additional editing by Jim Pollard